Copyright © 2008 Pearson Addison-Wesley. All rights reserved. Chapter 7 Risk Structure and Term...
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Transcript of Copyright © 2008 Pearson Addison-Wesley. All rights reserved. Chapter 7 Risk Structure and Term...
Copyright © 2008 Pearson Addison-Wesley. All rights reserved.
Chapter 7
Risk Structure and Term Structure of Interest Rates
Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 7-2
Default Risk
• Default risk is measured relative to risk-free U.S. Treasury bonds.
• Default-risk premium = bond yield - yield on a comparable default-risk-free bond.
• The risk premium reflects in part the bond rating.
Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 7-3
Table 7.1 Reading the Ratings Provided by Moody’s and Standard & Poor’s
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Figure 7.1 Determining Default Risk Premium in Yields
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Figure 7.2 Long-Term and Short-Term Yields in the United States, 1960–2006
Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 7-6
Figure 7.3 Effect on the Risk Premium of a Decrease in Liquidity
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Figure 7.4 Effect on Risk Premium of an Increase in Information Costs
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Figure 7.5 Effect of Differences in Tax Treatment on Yields
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Table 7.2 Risk Structure of Interest Rates
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Yield Curve
• Yield curve is a graph of U.S. Treasury debt instruments as a function of maturity.
• Yield curve generally slopes upward.
• Yields on Treasury securities of different maturities have typically moved together.
Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 7-11
Table 7.3 Theories of the Term Structure
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Figure 7.6 Using the Yield Curve to Predict Interest Rates: The Expectations Theory
Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 7-13
Figure 7.7 Interpreting the Yield Curve