CH6 - CHAPTER 6 Interest Rates Risk and Ret urn Bon ds(Deb...

Info iconThis preview shows pages 1–15. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: CHAPTER 6 Interest Rates Risk and Ret urn Bon ds (Deb t) FIN 3403- Bus iness Financ e Term Structur e Sup ply / Dem and Interest Rat es Bus iness Cyc le Mo netary Pol icy Fiscal Pol icy Mi cro Det ermi nant s Yield Cur ves Pur e Expe ctations Liquidity Prefer ence Financ ial Dec isions Price or Cost of Debt Capital What do we call the price, or cost, of debt capital? The interest rate or the cost of money. Price or Cost of Equity Capital What do we call the price, or cost, of equity capital? A “required return”, where, for stocks: Required Dividend Capital Return Yield Gain = + Cost of Money Factors affecting interest rates Macro: Production opportunities Time preference for consumption Micro: Risk Expected inflation D 1 D 2 S 1 S 2 r r * $ Interest Rates: Macro Supply and Demand Business cycle Monetary/fiscal policy Open market Fed-funds rate Reserve requirements Budget surplus or deficit Deposit Reserve Loanable 100.00 90.00 81.00 72.90 10.00 9.00 8.10 7.29 100.00 90.00 81.00 72.90 65.61 1,000.00 Reserve Requirements Risk and Ret urn Bon ds (Deb t) FIN 3403- Bus iness Financ e Term Structur e Sup ply / Dem and Interest Rat es Bus iness Cyc le Mo netary Pol icy Fiscal Pol icy Mi cro Det ermi nant s Yield Cur ves Pur e Expe ctations Liquidity Prefer ence Financ ial Dec isions Interest Rates: Micro r * = Real, risk-free rate T-bond rate if no inflation historically between 1% to 4% r = Any nominal rate (includes an adjustment for inflation) r = Rate on Treasury securities r * r * + IP + DRP + LP + MRP Nominal rate on debt Real, risk-free rate Inflation premium Default risk premium Liquidity premium Maturity risk premium MRP LP DRP IP r r Interest Rates: Micro Nominal, Risk-Free Rate Arithmetic : r RF,1 = r * 1 + I 1 r RF,N = r * N + IP N r * N = [r * 1 + r * 2 + … + r * N ] / [N] IP N = [I 1 + I 2 + … + I N ] / [N] Nominal, Risk-Free Rate Geometric : r RF,1 = [(1+r * 1 )(1+I 1 )] - 1.0 r RF,N = [(1+r * N )(1+ IP N )] - 1.0 r * N = [(1+r * 1 )(1+r * 2 )…(1+r * N )] 1/N- 1.0 IP N = [(1+I 1 )(1+I 2 )…(1+I N )] 1/N- 1.0 Example: Inflation Premium A representative bundle of goods and services currently costs...
View Full Document

This note was uploaded on 04/08/2009 for the course FIN 3403 taught by Professor Tapley during the Spring '06 term at University of Florida.

Page1 / 49

CH6 - CHAPTER 6 Interest Rates Risk and Ret urn Bon ds(Deb...

This preview shows document pages 1 - 15. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online