20 download_doc-6.php

20 download_doc-6.php - BUS-G 345 I. Preview a. Basics...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
BUS-G 345 Chapter 6 I. Preview a. Basics i. Completing the interest-rate picture by examining the relationship of various interest rates to one another ii. Understanding why interest rates differ from bond to bond can help businesses, banks, insurance companies, and private investors decide which bonds to purchase and which to sell iii. Risk structure of interest rates 1. Why bonds with the same maturity can have different interest rates iv. Term structure of interest rates 1. The relationship among interest raets on bonds with different terms to maturity II. Risk structure of interest rates a. Intro i. Interest rates on different categories of bonds differ from one another in any given year ii. The spread between interest rates varies over time b. Default risk i. One attribute that influences the interest rate of a bond ii. Default 1. Occurs when the issuer of the bond is unable or unwilling to make interest payments when promised or pay off the face value when the bond matures a. Often occurs when a corporation is suffering big losses i. Meaning their default risk would be high iii. US treasury bonds are considered default-free bonds 1. No default risk because the federal gov can always increase taxes to pay off its obligations
Background image of page 1

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

View Full DocumentRight Arrow Icon
BUS-G 345 Chapter 6 iv. Risk premium 1. The spread between the interest rates on bonds with default risk and default-free bonds, both of the same maturity 2. Indicates how much additional interest people must earn to be willing to hold a risky bond 3. A bond with default risk always has a positive risk premium 4. The higher the default risk, the larger the risk premium a. ↑ default risk → ↑ risk premium v. ↑ Default risk on a corporate bond → ↓ expected return 1. ↓ demand relative to treasury bonds, ↑ Treasury bond demand a. Increase risk decrease demand vi. Credit rating agencies 1. Investment advisory firms that rate the quality of corporate and municipal bonds in terms of probability of default a. Because default risk is so important to the size of risk premium, purchases need to know whether a corporation is likely to default on their bonds 2. Investment-grade securities a. Rating of Baa or BBB and above b. Bonds with relatively low risk of default 3. Junk bonds aka high-yield bonds a. Bonds with ratings below Baa or BBB b. Bonds with relatively high risk of default c. Always have higher interest rates than investment-grade securities i. Corporate bonds always have higher interest rates than US treasury bonds because they always have some risk of default and Treasury bonds don’t
Background image of page 2
BUS-G 345 Chapter 6 c. Liquidity i. Influences a bonds interest rate ii. The more liquid an asset, the more desirable iii. US treasury bonds are the most liquid of all long-term bonds because they
Background image of page 3

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

View Full DocumentRight Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 9

20 download_doc-6.php - BUS-G 345 I. Preview a. Basics...

This preview shows document pages 1 - 4. Sign up to view the full document.

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