45 6 t 1 r 1 r corporate finance tri vi dang columbia

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Unformatted text preview: 5 y is called the yield to maturity (or the yield). Remark - Yield is the “average” interest rate. - If the interest rate is constant, than the yield is the interest rate. See Problem Set 1. Corporate Finance, Tri Vi Dang, Columbia University, Fall 2013 32 Definition The yield curve or term structure of interest gives the interest rate of a zero coupon government bond for different maturities. Corporate Finance, Tri Vi Dang, Columbia University, Fall 2013 33 Example 2 …. Years to maturity 1 2 3 4 Yield (%) 3% 3.2% 4% 4.1% Yield of a 1-year Zero coupon bond 30 …. 6% Yield of a 2-year Zero coupon bond Corporate Finance, Tri Vi Dang, Columbia University, Fall 2013 34 Remark 3 - Yield curve can be decreasing, increasing, or flat. - In 09/1992 the yield curve is sharply increasing. - In 04/2000 the yield curve is slightly decreasing. Corporate Finance, Tri Vi Dang, Columbia University, Fall 2013 35 Example 3 Corporate Bonds There is a probability of default (i.e. no repayment) Payment dates: 1 2 3 4 5 6 Payment $10 $10 $10 $10 $10+$100 $10 Corporate Finance, Tri Vi Dang, Columbia University, Fall 2013 36 Remark The interest rate (or the cost of debt) depends on the default probability. Rating agencies provides information about default probabilities. AAA rating : very low default probability AA+ rating, …. C rating : high default probability Corporate Finance, Tri Vi Dang, Columbia Unive...
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This document was uploaded on 02/16/2014 for the course ECON w4280 at Columbia.

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