Econ+310+Fall+2009+Topic+4b

Econ+310+Fall+2009+Topic+4b - Economics310 MoneyandBanking...

Info iconThis preview shows pages 1–13. Sign up to view the full content.

View Full Document Right Arrow Icon
Economics 310 Money and Banking Topic 4(b) Bond Markets and  Interest Rates  
Background image of page 1

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

View Full DocumentRight Arrow Icon
2 Lecture 1 Reading Bond Market and Interest Rates Additional Reading on CTools:  Bernanke speech   Assignment Assignment 3 will be posted on CTools this  afternoon
Background image of page 2
3 Lecture 1 Bond market or markets? Discussion asserts a single market for  bonds At times a useful abstraction Obviously inaccurate Understand relationship between different  bond prices to enable use of the single bond  market abstraction
Background image of page 3

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

View Full DocumentRight Arrow Icon
4 Lecture 1 Range of Bonds Who issues bonds? Federal Government (Treasury bonds, notes and bills) State and Local Governments Corporations Primary distinguishing features: Default risk Liquidity Tax treatment Term to maturity
Background image of page 4
5 Lecture 1 Default Risk Treasury bonds: no appreciable default  risk Taxation may be used to raise funds to pay  bond obligations Not completely default free E.g. budget bill negotiations  Not true of centrally issued debt in other  countries
Background image of page 5

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

View Full DocumentRight Arrow Icon
6 Lecture 1 Default Risk Municipal bonds Some default risk (no significant taxation  powers) Corporate bonds Wide array of default risks Value is dependent on (real) investments  backing the debt
Background image of page 6
7 Lecture 1 Risk Premium When discussing demand for bonds: Greater risk implied lower demand Lower expected returns implied lower  demand Expect bonds with higher default risk to  display lower demand Lower demand implies lower price Lower price synonymous with higher interest  rate
Background image of page 7

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

View Full DocumentRight Arrow Icon
8 Lecture 1 Demand low risk Demand high risk Supply P low risk P high risk Q high risk Q low risk Q P
Background image of page 8
9 Lecture 1 Risk Premium Remember:  interest rate and price of  bond are inversely related High risk bond has a low price Also has high interest rate Low risk bond has a high price Also has a low interest rate Difference between interest rates for the low  and high risk assets is called the  risk premium High risk bond attracts a high interest rate to  compensate for the high risk
Background image of page 9

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

View Full DocumentRight Arrow Icon
10 Lecture 1 Liquidity Another influence on bond prices is  liquidity: Treasury bonds, for example, are extremely  liquid Means these have relatively high demand Relatively illiquid bonds will have  Low demand Low price High interest rate Observe the liquidity premium
Background image of page 10
11 Lecture 1
Background image of page 11

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

View Full DocumentRight Arrow Icon
Lecture 1 Tax concerns Risk and liquidity premiums cannot  explain low municipal bond yield Higher default risk than T-bonds Less liquid than T-bonds These should mean that demand lies below  that for a similar T-bond. Municipal bonds are issued tax-free
Background image of page 12
Image of page 13
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 38

Econ+310+Fall+2009+Topic+4b - Economics310 MoneyandBanking...

This preview shows document pages 1 - 13. Sign up to view the full document.

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