Class 8 Revised Chapter 7 Risk and Term Structure Discussion

Class 8 Revised - Class 8 Chap 7 Risk structure and Term Structure Discussion Risk Structure maturity held constantcompares yields across issuers I

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Class 8 Chap 7: Risk structure and Term Structure Discussion Risk Structure : maturity held constant—compares yields across issuers I. Understand the purpose and reasons for Bond ratings a. Know the meaning of investment grade bonds and ratings range: S&P ( AAA – BBB); Moody’s (Aaa – Baa) b. Know the meaning of junk bonds ( below Baa or BBB) b.i. Understand fallen Angel b.ii. Understand flight to quality and its consequences. b.ii.1. Decreases yields on Treasuries and increases yields on corporate bonds b.ii.2. This causes business cost of capital to increase II. Understand yield spread : Treasuries are the “benchmark” or standard for quoting bonds. Corporate Bonds are usually quoted on a “spread” basis as a benchmark treasury + a spread which the risk or default premium. a. Graph effects of an increase in risk on spreads on yields on corporate bonds b. Compare treasury yields to Aaa and Baa yields (See Fig 7.2) c. Compare T-bills to Commercial paper ( See fig 7.2)
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This note was uploaded on 02/22/2012 for the course MANEC 453 taught by Professor Jerrynelson during the Winter '10 term at BYU.

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Class 8 Revised - Class 8 Chap 7 Risk structure and Term Structure Discussion Risk Structure maturity held constantcompares yields across issuers I

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