chap06 - 6-1CHAPTER 6Interest RatesDeterminants of interest...

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Unformatted text preview: 6-1CHAPTER 6Interest RatesDeterminants of interest ratesThe term structure and yield curvesInvesting overseas6-2Why are these rates different?3-month Treasury Bill5.15%5-year Treasury Note4.71%5-year A Corporate Bond5.33%10-year Treasury bond4.83%10-year A Corporate Bond5.78%30-year Treasury bond4.92%6-3What four factors affect the level of interest rates?Production opportunitiesTime preferences for consumptionRiskExpected inflation6-4Nominal vs. Real ratesr= represents any nominal rater*= represents the real risk-free rate of interest. Like a T-bill rate, if there was no inflation. Typically ranges from 1% to 4% per year.rRF= represents the rate of interest on Treasury securities.6-5Determinants of interest ratesr = r* + IP + DRP + LP + MRPr = required return on a debt securityr*= real risk-free rate of interestIP= inflation premiumDRP= default risk premiumLP= liquidity premiumMRP= maturity risk premium6-6Premiums added to r* for different types of debtIPMRPDRPLPS-T TreasuryL-T TreasuryS-T CorporateL-T Corporate6-7Yield curve and the term structure of interest ratesTerm structure relationship between interest rates (or yields) and maturities....
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This note was uploaded on 02/27/2009 for the course FIN 221 taught by Professor Dyer during the Fall '08 term at University of Illinois at Urbana–Champaign.

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chap06 - 6-1CHAPTER 6Interest RatesDeterminants of interest...

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