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# ch 3 - CHAPTER 3 Structure of Interest Rates 1 A...

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1 CHAPTER 3 Structure of Interest Rates

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2 A. Characteristics of Debt Securities that Cause Their Yields to Vary Debt (Default) Risk Rating Agencies Moody’s Investor Service Standard and Poor’s Corporation Accuracy of Credit Ratings Shifts in Credit Risk Premiums
3 A. Characteristics of Debt Securities that Cause Their Yields to Vary Liquidity the ease of conversion to cash without loss of value. the lower a securities liquidity, the higher the yield preferred by investor.

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4 A. Characteristics of Debt Securities that Cause Their Yields to Vary Tax Status Investors are more concerned with after- tax income. Taxable securities must offer a higher before-tax yield
5 A. Characteristics of Debt Securities that Cause Their Yields to Vary To compute the equivalent Before-Tax Yield: where τ at = After-tax yield τ bt = Before-tax yield T = Investor’s marginal tax rate ) 1 ( τ ψ ψ - = bt at

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6 Example Calculate the after tax yield for a security whose pre-tax yield is 10% assuming a tax rate of 30%. % 7 7 . ) 3 . 1 ( 10 . ) 1 ( = - = - = τ ψ ψ bt at
7 A. Characteristics of Debt Securities that Cause Their Yields to Vary Term to Maturity maturity dates will differ between debt securities The term structure of interest rates defines the relationship between term to maturity and the annualized yield

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8 A. Characteristics of Debt Securities that Cause Their Yields to Vary
9 B. Estimating Debt Yield Explaining Actual Yield Differentials Basis points (bp) are often quoted where 1bp = .01% = .0001 100bp = 1% = .01

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10 B. Estimating Debt Yield
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ch 3 - CHAPTER 3 Structure of Interest Rates 1 A...

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