Chapter-6 - 6/17/2010 Chapter 6 Interest Rates Cost of...

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6/17/2010 1 Interest Rates Chapter 6 ± Cost of Money and Interest Rate Levels ± Determinants of Interest Rates ± The Term Structure and Yield Curves ± Using Yield Curve to Estimate Future Interest Rates 6-1 What four factors affect the level of interest rates? ± Production opportunities ± Time preferences for consumption ± Risk ± Expected inflation 6-2 “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 5% 6-3 per year. r RF = represents the rate of interest on Treasury securities.
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6/17/2010 2 Determinants of Interest Rates r = r* + IP + DRP + LP + MRP r = required return on a debt security r* real risk free rate of interes 6-4 r* = real risk-free rate of interest IP = inflation premium DRP = default risk premium LP = liquidity premium MRP = maturity risk premium Premiums Added to r* for Different Types of Debt IP MRP DRP LP S-T Treasury 9 6-5 L-T Treasury 99 S-T Corporate 9 L-T Corporate 9999 Yield Curve and the Term Structure of Interest Rates ± Term structure – relationship between interest rates (or yields) and maturities 8% 10% 12% 14% Interest March 1980 6-6 and maturities.
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This note was uploaded on 03/09/2011 for the course ACCT 215 taught by Professor Kv during the Spring '11 term at Keystone.

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Chapter-6 - 6/17/2010 Chapter 6 Interest Rates Cost of...

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