LectureNote6

LectureNote6 - LECTURE SIX The Risk and Term Structure of...

Info iconThis preview shows pages 1–9. Sign up to view the full content.

View Full Document Right Arrow Icon
LECTURE SIX The Risk and Term Structure of Interest Rates ECONOMICS 209 Professor Kevin Huang Vanderbilt University
Background image of page 1

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

View Full DocumentRight Arrow Icon
6-1 The Risk and Term Structure of Interest Rates We have studied the determination of one interest rate There are many bonds on which the interest rates, which may co-move to a certain extent over time, can differ in both their levels and volatilities The risk structure of interest rates reveals that bonds with the same term to maturity can have different interest rates The term structure of interest rates reveals that bonds with identical risk characteristics can have different interest rates due to their different terms to maturity The relationships among these interest rates are important for understanding the business cycle and the conduct of monetary policy
Background image of page 2
6-2 Risk Structure of Interest Rates Default risk—occurs when the issuer of the bond is unable or unwilling to make interest payments or pay off the face value ± U.S. T-bonds are considered default free ± Risk premium—the spread between the interest rates on bonds with default risk and the interest rates on T-bonds Liquidity—the ease with which an asset can be converted into cash Income tax considerations
Background image of page 3

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

View Full DocumentRight Arrow Icon
6-3
Background image of page 4
6-4
Background image of page 5

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

View Full DocumentRight Arrow Icon
6-5
Background image of page 6
6-6
Background image of page 7

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

View Full DocumentRight Arrow Icon
6-7 Term Structure of Interest Rates Bonds with identical risk, liquidity, and tax characteristics can have different interest rates because the time remaining to maturity is different Yield curve—a plot of the yield on bonds with differing terms to maturity but the same risk, liquidity and tax considerations ± An upward-sloping yield curve implies that long-term rates are above short-term rates ± A flat yield curve implies that short- and long-term rates are the same ± An inverted yield curve implies that long-term rates are below short-term rates
Background image of page 8
Image of page 9
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 04/07/2008 for the course ECON 209 taught by Professor Professor during the Spring '08 term at Vanderbilt.

Page1 / 27

LectureNote6 - LECTURE SIX The Risk and Term Structure of...

This preview shows document pages 1 - 9. Sign up to view the full document.

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