金融市場(chǎng)英文教學(xué)課件：ch5 How Do The Risk and Term Structure Affect Interest Rates

1、Chapter 5How Do The Risk and Term Structure Affect Interest RatesCopyright 2009 Pearson Prentice Hall. All rights reserved.5-2Chapter PreviewWe will fist examine bonds that offer similar payment streams but differ in price. The price differences are due to the risk structure of interest rates. We wi

2、ll examine in detail what this risk structure looks like and ways to examine it.Copyright 2009 Pearson Prentice Hall. All rights reserved.5-3Chapter PreviewNext, we will look at the different rates required on bonds with different maturities. That is, we typically observe higher rates on longer-term

3、 bonds. This is known as the term structure of interest rates. To study this, we usually look at Treasury bonds to minimize the impact of other risk factors.Copyright 2009 Pearson Prentice Hall. All rights reserved.5-4Chapter PreviewSo, in sum, we will examine how the individual risk of a bond affec

4、ts its required rate. We also explore how the general level of interest rates varies with the maturity of the debt instruments. Topics include:Risk Structure of Interest RatesTerm Structure of Interest RatesCopyright 2009 Pearson Prentice Hall. All rights reserved.5-5Risk Structure of Interest Rates

5、To start this discussion, we first examine the yields for several categories of long-term bonds over the last 85 years.You should note several aspects regarding these rates, related to different bond categories and how this has changed through time.Copyright 2009 Pearson Prentice Hall. All rights re

6、served.5-6Risk Structure of Long Bonds in the U.S.Copyright 2009 Pearson Prentice Hall. All rights reserved.5-7Risk Structure of Long Bonds in the U.S.The figure show two important features of the interest-rate behavior of bonds.Rates on different bond categories change from one year to the next.Spr

7、eads on different bond categories change from one year to the next.Copyright 2009 Pearson Prentice Hall. All rights reserved.5-8Factors Affecting Risk Structure of Interest RatesTo further examine these features, we will look at three specific risk factors.Default RiskLiquidityIncome Tax Considerati

8、onsCopyright 2009 Pearson Prentice Hall. All rights reserved.5-9Default Risk FactorOne attribute of a bond that influences its interest rate is its risk of default, which occurs when the issuer of the bond is unable or unwilling to make interest payments when promised.U.S. Treasury bonds have usuall

9、y been considered to have no default risk because the federal government can always increase taxes to pay off its obligations (or just print money). Bonds like these with no default risk are called default-free bonds.Copyright 2009 Pearson Prentice Hall. All rights reserved.5-10Default Risk Factor (

10、cont.)The spread between the interest rates on bonds with default risk and default-free bonds, called the risk premium, indicates how much additional interest people must earn in order to be willing to hold that risky bond.A bond with default risk will always have a positive risk premium, and an inc

11、rease in its default risk will raise the risk premium.Copyright 2009 Pearson Prentice Hall. All rights reserved.5-11Increase in Default Risk on Corporate BondsCopyright 2009 Pearson Prentice Hall. All rights reserved.5-12Analysis of Figure 5.2: Increase in Default on Corporate BondsCorporate Bond Ma

12、rketRe on corporate bonds , Dc , Dc shifts leftRisk of corporate bonds , Dc , Dc shifts leftPc , ic Treasury Bond MarketRelative Re on Treasury bonds , DT , DT shifts rightRelative risk of Treasury bonds , DT , DT shifts rightPT , iT OutcomeRisk premium, ic - iT, risesCopyright 2009 Pearson Prentice

13、 Hall. All rights reserved.5-13Default Risk Factor (cont.)Default risk is an important component of the size of the risk premium.Because of this, bond investors would like to know as much as possible about the default probability of a bond.One way to do this is to use the measures provided by credit

14、-rating agencies: Moodys and S&P are examples.Copyright 2009 Pearson Prentice Hall. All rights reserved.5-14Bond RatingsCopyright 2009 Pearson Prentice Hall. All rights reserved.5-15Bond RatingsExplain Figure 5.1Copyright 2009 Pearson Prentice Hall. All rights reserved.5-16Liquidity FactorAnother at

15、tribute of a bond that influences its interest rate is its liquidity; a liquid asset is one that can be quickly and cheaply converted into cash if the need arises. The more liquid an asset is, the more desirable it is (higher demand), holding everything else constant.Lets examine what happens if a c

16、orporate bond becomes less liquid.Copyright 2009 Pearson Prentice Hall. All rights reserved.5-17Decrease in Liquidity of Corporate BondsFigure 5.2 Response to a Decrease in the Liquidity of Corporate BondsCopyright 2009 Pearson Prentice Hall. All rights reserved.5-18Analysis of Figure 5.1: Corporate

17、 Bond Becomes Less LiquidCorporate Bond MarketLiquidity of corporate bonds , Dc , Dc shifts leftPc , ic Treasury Bond MarketRelatively more liquid Treasury bonds, DT , DT shifts rightPT , iT Outcome Risk premium, ic - iT, risesRisk premium reflects not only corporate bonds default risk but also lowe

18、r liquidityCopyright 2009 Pearson Prentice Hall. All rights reserved.5-19Liquidity Factor (cont.)The differences between interest rates on corporate bonds and Treasury bonds (that is, the risk premiums) reflect not only the corporate bonds default risk but its liquidity too. This is why a risk premi

19、um is sometimes called a risk and liquidity premium.Copyright 2009 Pearson Prentice Hall. All rights reserved.5-20Income Taxes Factorthe municipal bonds tend to have a lower rate the Treasuries. Why?Munis certainly can default. Orange County (California) is a recent example from the early 1990s.Muni

20、s are not as liquid a Treasuries.Copyright 2009 Pearson Prentice Hall. All rights reserved.5-21Income Taxes FactorHowever, interest payments on municipal bonds are exempt from federal income taxes, a factor that has the same effect on the demand for municipal bonds as an increase in their expected r

21、eturn.Treasury bonds are exempt from state and local income taxes, while interest payments from corporate bonds are fully taxable.Copyright 2009 Pearson Prentice Hall. All rights reserved.5-22Income Taxes FactorFor example, suppose you are in the 35% tax bracket. From a 10%-coupon Treasury bond, you

22、 only net $65 of the coupon payment because of taxesHowever, from an 8%-coupon muni, you net the full $80. For the higher return, you are willing to hold a riskier muni (to a point).Copyright 2009 Pearson Prentice Hall. All rights reserved.5-23Tax Advantages of Municipal BondsCopyright 2009 Pearson

23、Prentice Hall. All rights reserved.5-24Analysis of Figure 5.3: Tax Advantages of Municipal Bonds Municipal Bond MarketTax exemption raises relative Re on municipal bonds, Dm , Dm shifts rightPm Treasury Bond MarketRelative Re on Treasury bonds , DT , DT shifts leftPT Outcomeim iTCopyright 2009 Pears

24、on Prentice Hall. All rights reserved.5-25Case: Bush Tax Cut and Interest RatesThe 2001 tax cut called for a reduction in the top tax bracket, from 39% to 35% over a 10-year period.This reduces the advantage of municipal debt over T-securities since the interest on T-securities is now taxed at a low

25、er rate.Copyright 2009 Pearson Prentice Hall. All rights reserved.5-26Term Structure of Interest RatesNow that we understand risk, liquidity, and taxes, we turn to another important influence on interest rates maturity.Bonds with different maturities tend to have different required rates, all else e

26、qual.Copyright 2009 Pearson Prentice Hall. All rights reserved.5-27Term Structure Facts to Be ExplainedBesides explaining the shape of the yield curve, a good theory must explain why:Interest rates for different maturities move together. We see this on the next slide.Copyright 2009 Pearson Prentice

27、Hall. All rights reserved.5-28Interest Rates on Different Maturity Bonds Move TogetherCopyright 2009 Pearson Prentice Hall. All rights reserved.5-29Term Structure Facts to Be ExplainedBesides explaining the shape of the yield curve, a good theory must explain why:Interest rates for different maturit

28、ies move together. Yield curves tend to have steep upward slope when short rates are low and downward slope when short rates are high.Yield curve is typically upward sloping.Copyright 2009 Pearson Prentice Hall. All rights reserved.5-30Three Theories of Term StructureExpectations Theory Pure Expecta

29、tions Theory explains 1 and 2, but not 3Market Segmentation TheoryMarket Segmentation Theory explains 3, but not 1 and 2Liquidity Premium TheorySolution: Combine features of both Pure Expectations Theory and Market Segmentation Theory to get Liquidity Premium Theory and explain all factsCopyright 20

30、09 Pearson Prentice Hall. All rights reserved.5-31Expectations TheoryThe interest rate on a long-term bond will equal an average of the short-term interest rates that people expect to occur over the life of the long-term bond.An exampleCopyright 2009 Pearson Prentice Hall. All rights reserved.5-32Ex

31、pectations TheoryKey Assumption: Bonds of different maturities are perfect substitutesImplication: Re on bonds of different maturities are equal Copyright 2009 Pearson Prentice Hall. All rights reserved.5-33Expectations TheoryTo illustrate what this means, consider two investment strategies for a tw

32、o-year time horizon.Buy $1 of one-year bond, and when it matures, buy another one-year bond with your money.Buy $1 of two-year bond and hold it.Copyright 2009 Pearson Prentice Hall. All rights reserved.5-34Expectations TheoryThe important point of this theory is that if the Expectations Theory is co

33、rrect, your expected wealth is the same (a the start) for both strategies. Example 5.2Copyright 2009 Pearson Prentice Hall. All rights reserved.5-35Expectations TheoryGenerallyExpected return from strategy 1Since it(iet+1) is also extremely small, expected return is approximately it + iet+1Copyright

34、 2009 Pearson Prentice Hall. All rights reserved.5-36Since (i2t)2 is extremely small, expected return is approximately 2(i2t)Expectations TheoryExpected return from strategy 2Copyright 2009 Pearson Prentice Hall. All rights reserved.5-37Expectations TheoryFrom implication above expected returns of t

35、wo strategies are equalThereforeSolving for i2t(1)The two-period rate must equal the average of the two one-period rates.Copyright 2009 Pearson Prentice Hall. All rights reserved.5-38Expectations TheoryTo help see this, heres a picture that describes the same information:Copyright 2009 Pearson Prent

36、ice Hall. All rights reserved.5-39More generally for n-period bondEquation 2 states that the interest rate on a long-term bond equals the average of short rates expected to occur over life of the long-term bond.(2)A longer maturity Copyright 2009 Pearson Prentice Hall. All rights reserved.5-40More g

37、enerally for n-period bondExample 5.3Numerical exampleOne-year interest rate over the next five years are expected to be 5%, 6%, 7%, 8%, and 9%Interest rate on two-year bond today:(5% + 6%)/2 = 5.5%Interest rate for five-year bond today:(5% + 6% + 7% + 8% + 9%)/5 = 7%Interest rate for one- to five-y

38、ear bonds today:5%, 5.5%, 6%, 6.5% and 7% Copyright 2009 Pearson Prentice Hall. All rights reserved.5-41Expectations Theory and Term Structure FactsExplains why yield curve has different slopesWhen short rates are expected to rise in future, average of future short rates = int is above todays short

39、rate; therefore yield curve is upward sloping.When short rates expected to stay same in future, average of future short rates same as todays, and yield curve is flat.Only when short rates expected to fall will yield curve be downward sloping.Copyright 2009 Pearson Prentice Hall. All rights reserved.

40、5-42Expectations Theory and Term Structure FactsPure expectations theory explains fact 1that short and long rates move togetherShort rate rises are persistent If it today, iet+1, iet+2 etc. average of future rates int Therefore: it int (i.e., short and long rates move together)Copyright 2009 Pearson

41、 Prentice Hall. All rights reserved.5-43Expectations Theory and Term Structure FactsExplains fact 2that yield curves tend to have steep slope when short rates are low and downward slope when short rates are highWhen short rates are low, they are expected to rise to normal level, and long rate = aver

42、age of future short rates will be well above todays short rate; yield curve will have steep upward slope.When short rates are high, they will be expected to fall in future, and long rate will be below current short rate; yield curve will have downward slope.Copyright 2009 Pearson Prentice Hall. All

43、rights reserved.5-44Expectations Theory and Term Structure FactsDoesnt explain fact 3that yield curve usually has upward slopeShort rates are as likely to fall in future as rise, so average of expected future short rates will not usually be higher than current short rate: therefore, yield curve will

44、 not usually slope upward.Copyright 2009 Pearson Prentice Hall. All rights reserved.5-45Market Segmentation TheoryMarkets for different-maturity bonds as completely separate and segmented.Key Assumption: Bonds of different maturities are not substitutes at all Why?Implication: Markets are completely

45、 segmented;interest rate at each maturity aredetermined separatelyCopyright 2009 Pearson Prentice Hall. All rights reserved.5-46Market Segmentation TheoryExplains fact 3that yield curve is usually upward slopingPeople typically prefer short holding periods and thus have higher demand for short-term

46、bonds, which have higher prices and lower interest rates than long bondsDoes not explain fact 1or fact 2 because its assumes long-term and short-term rates are determined independently.Copyright 2009 Pearson Prentice Hall. All rights reserved.5-47Liquidity Premium TheoryThe interest rate on a long-t

47、erm bond will equal an average of the short-term interest rates that people expect to occur over the life of the long-term bond plus a liquidity premium that responds to supply and demand conditions for that bond.Key Assumption:Bonds of different maturities are substitutes, but are not perfect subst

48、itutesImplication: Modifies Pure Expectations Theory with features of Market Segmentation Theory Copyright 2009 Pearson Prentice Hall. All rights reserved.5-48Liquidity Premium TheoryInvestors prefer short-term rather than long-term bonds. This implies that investors must be paid positive liquidity premium, int, to hold long term bonds.Copyright 2009 Pearson Prentice Hall. All rights reserved.5-49Liquidity Premium TheoryResults in following modification of Expectations Theory, where lnt is the liquidi