Chapter 06.ppt

# Chapter 06.ppt - CHAPTER 6 Interest Rates Determinants of...

This preview shows pages 1–9. Sign up to view the full content.

6-1 CHAPTER 6 Interest Rates Determinants of interest rates The term structure and yield  curves Investing overseas

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

View Full Document
6-2 What four factors affect the level  of interest rates? Production  opportunities Time preferences for  consumption Risk Expected inflation
6-3 “Nominal” vs. “Real” rates r = represents any nominal rate r* = 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. r RF = represents the rate of interest on  Treasury securities.

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

View Full Document
6-4 Determinants of interest rates r = r* + IP + DRP + LP + MRP r   = required return on a debt security r* = real risk-free rate of interest IP = inflation premium DRP= default risk premium LP = liquidity premium MRP= maturity risk premium
6-5 Premiums added to r* for  different types of debt IP MR P DR P LP S-T Treasury L-T Treasury S-T Corporate L-T Corporate

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

View Full Document
6-6 Yield curve and the term  structure of interest rates Term structure –  relationship between  interest rates (or  yields) and maturities. The yield curve is a  graph of the term  structure. The November 2005  Treasury yield curve  is shown at the right. 0 1 2 3 4 5 6 0.25 0.5 2 5 10 30 Maturity (years) Yield  (% )
6-7 Constructing the yield curve:  Inflation Step 1 – Find the average expected inflation  rate over years 1 to N: N INFL IP N 1 t t N = =

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

View Full Document
6-8 Constructing the yield curve: Inflation Assume inflation is expected to be 5% next year,  6% the following year, and 8% thereafter. IP
This is the end of the preview. Sign up to access the rest of the document.

## This note was uploaded on 09/08/2010 for the course BUS 170 at San Jose State.

### Page1 / 23

Chapter 06.ppt - CHAPTER 6 Interest Rates Determinants of...

This preview shows document pages 1 - 9. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online