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1、Click to edit Master text styles,Second level,Third level,Fourth level,Fifth level,Click to edit Master title style,3,Structure of Interest Rates,2003 South-Western/Thomson Learning,Chapter Objectives,Learn why individual interest rates differ or why security prices vary or change,Analyze theories e

2、xplaining why rates vary by term or maturity,called the term structure of interest rates,Factors Affecting Security Yields,Risk-averse investors,（厭惡風險的投資者）,demand higher yields for added,riskiness,.,Risk is associated with variability of returns.,Increased,riskiness,generates lower security prices o

3、r higher investor required rates of return.,Factors Affecting Security Yields,Security yields and prices are affected by levels and changes in:,Default risk(also called Credit Risk),Liquidity,Tax status,Term to maturity,Special contract provisions such as embedded options,Credit(Default)risk,Definit

4、ions:,Credit risk,refers to the chance that the issuer of the debt security will,default,.,Default-free bonds,，,which is also called risk-free bonds,，,refers to T-bonds which have no default risk.,Risk premium,refers to the spread between interest rates on bonds with,defaut,risk and default-free,bon

5、ds.The,higher the credit risk is,，,the larger the risk premium is.,Response to an increase in default risk on Corporate bonds,Lets assume that initially there is no possibility of default on the corporate bonds so they are default-free like treasury bonds.,In this case these two bonds have the same

6、risk and maturity,therefore their prices and interest rates will initially be equal.,Response to an increase in default risk on Corporate bonds,Risk premium,The risk premium on corporate bonds is,i,C,-,i,T,.,Default risk premium=risky security yield treasury security yield of same maturity,C-bonds,T

7、-bonds,i,C,The,risk-free,i,T,for given maturity,serves as a benchmark.,D,C,D,T,S,C,S,T,Factors Affecting Security Yields,Rating agencies set default risk ratings.,Rating Assigned by:,Description of Security,Moodys,S&Ps,Highest quality,Aaa,AAA,High quality,Aa,AA,High-medium quality,A,A,medium quality

8、,Baa,BBB,Medium-low quality,Ba,BB,Low,quality(speculative,),B,B,Poor quality,Caa,CCC,Very poor quality,Ca,CC,Lowest,quality(in,default),C,DDD,D,Investment grade bonds,speculation grade bonds,Anticipated or actual ratings changes impact security prices and yields.,Factors Affecting Security Yields,A

9、liquid investment is easily converted to cash at minimum transactions cost.,Investors pay more(lower yield)for liquid investment.,Liquidity is associated with short-term,low default risk,marketable securities.,The Liquidity of a security affects the yield/price of the security.,Liquidity,is the abil

10、ity to sell a security quickly at close to the true market value.,Factors Affecting Security Yields,Tax status of income or gain on security impacts the security yield.,Investor concerned with after-tax return or yield.,Investors require higher yields for higher taxed securities.,Factors Affecting S

11、ecurity Yields,Y,at,=,Y,bt,(1,T,),Where,:,Y,at,=after-tax yield,Y,bt,=before-tax yield,T,=investors marginal tax rate,Factors Affecting Security Yields,Example:a taxable security that offers a before-tax yield of 14 percent.The investors tax rate is 20 percent.Calculate the after-tax yield.,Y,at,=14

12、%(1 0.2),=11.2%,The fully taxable pre-tax equivalent corporate bond for a 11.2%municipal bond is:,Y,bt,=11.2%/(1 .2)=14%,Factors Affecting Security Yields,Term to maturity,Interest rates typically vary by maturity,i.e.the longer the term to maturity,the higher the interest rate.,The,term structure o

13、f interest rates,refers to the relationship among interest rates on bonds with the same credit risk,liquidity and tax considerations but different terms to maturity.,Yield Curve,An upward-sloping yield curve indicates that Treasury,Securities with longer maturities offer higher annual yields.,Yield,

14、%,Time to Maturity,The Yield Curve is the plot of current interest yields versus time to maturity.,Yield Curve Shapes,Normal,Level or Flat,Inverted,Factors Affecting Security Yields,Special Provisions,Call Feature:a special provision that enables borrower to buy back the bonds before maturity at a s

15、pecified price(usually at a higher price),Call features are exercised when interest rates have declined.,Investors demand higher yield on callable bonds,especially when rates are expected to fall in the future.,Factors Affecting Security Yields,Special provisions,Convertible bonds,Convertibility fea

16、ture,allows investors to convert the bond into a specified number of common stock shares.,Investors will accept a lower yield for convertible bonds because investor returns include expected return on equity participation.,（可轉換債券）,Estimating the Appropriate Yield,Y,n,=,R,f,n,+,DP,+,LP,+,TA,+CALLP+COND,Where:,Y,n,=yield of an,n,-day security,R,f,n,=yield on an,n,-day Treasury,(risk-free)security,DP,=default premium(credit risk),LP,=liquidity premium,TA,=adjustment for tax status,CALLP=call feature