{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Ch 7 - The Risk and Term Structure of Interest Rates I...

Info icon This preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
The Risk and Term Structure of Interest Rates I. Introduction a. Changes in bond prices and the associated changes in interest rates, can have a pronounced effect on borrowing costs corporations face i. In 1998 we saw the simultaneous increase in some interest rates and decline in others- a rise in what are called interest rate spreads ii. Changes in the perceived risk of Ford and GM’s bonds led to decline in prices iii. This leads to increases in interest rates and higher corporate borrowing costs b. We must be able to distinguish among many different tyoes iof bonds that are traded in financial markets i. The Purpose of this Chapter is: 1. To examine how the issuer and time to maturity affect the price of a bond and 2. Use our knowledge to interpret fluctuations in a broad variety of bond prices II. Ratings and The Risk Structure of Interest Rates a. Default is one of the most important risks a bondholder faces b. In Fact, independent companies (rating agencies) have arisen to evaluate the creditworthiness of potential borrowers i. Estimate the likelihood that the corporate or government borrower will make a bond’s promised payments ii. The government has acknowledged a few firms as “nationally recognized statistical rating organizations” (NRSROs) III. Bond Ratings a. The best known bond rating services are i. Moody’s ii. Standard & Poor’s b. The monitor the status of individual bond issuers and assess the likelihood a lender will be repaid by the bond issuer c. A high rating suggests that a bond issuer will have little problem meeting a
Image of page 1

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

View Full Document Right Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern