金融市場英文教學(xué)課件：Chapter 4 Why Do Interest Rates Change

1、Chapter 4Why Do Interest Rates Change? PAGE 23Chapter 4Why Do Interest Rates Change?Determinants of Asset DemandWealthExpected ReturnsRiskLiquiditySummarySupply and Demand in the Bond MarketDemand CurveSupply CurveMarket EquilibriumSupply and Demand AnalysisChanges in Equilibrium Interest RatesShift

2、s in the Demand for BondsShifts in the Supply of BondsCase: Changes in the Equilibrium Interest Rate Due to Expected Inflation: The Fisher EffectCase: Changes in the Interest Rate Due to a Business Cycle ExpansionCase: Explaining Low Japanese Interest RatesCase: Reading the Wall Street Journal: The

3、“Credit Markets” ColumnThe Wall Street Journal: Following the News: The “Credit Markets” ColumnThe Practicing Manager: Profiting from Interest-Rate ForecastsThe Wall Street Journal: Following the News: Forecasting Interest RatesAppendix 1: Models of Asset PricingAppendix 2: Applying the Asset Market

4、 Approach to a Commodity Market: The Case of GoldAppendix 3: Loanable Funds FrameworkAppendix 4: Supply and Demand in the Market for Money: The Liquidity Preference FrameworkOverview and Teaching TipsAs is clear in the Preface to the textbook, I believe that financial markets and institutions is tau

5、ght effectively by emphasizing a few analytic principles and then applying them over and over again to the subject matter of this exciting field. Chapter 4 introduces one of these basic principles: the determinants of asset demand. It indicates that there are four primary factors that influence peop

6、les decisions to hold assets: wealth, expected returns, risk, and liquidity. The simple idea that these four factors explain the demand for assets is, in fact, an extremely powerful one. It is used continually throughout the study of financial markets and institutions and makes it much easier for th

7、e student to understand how interest rates are determined, how financial institutions manage their assets and liabilities, why financial innovation takes place, how prices are determined in the stock market and the foreign exchange market.One teaching device that I have found helps students develop

8、their intuition is the use of summary tables, such as Table 1, in class. I use the blackboard to write a list of changes in variables that affect the demand for an asset and then ask students to fill in the table by reasoning how demand responds to each change. This exercise gives them good practice

9、 in developing their analytic abilities. I use this device continually throughout my course and in this book, as is evidenced from similar summary tables in later chapters. I recommend this approach highly.The rest of Chapter 4 lays out a partial equilibrium approach to the determination of interest

10、 rates using the supply and demand in the bond market. An important feature of the analysis in this chapter is that supply and demand is always done in terms of stocks of assets, not in terms of flows. Recent literature in the professional journals almost always analyzes the determination of prices

11、in financial markets with an asset-market approach: that is, stocks of assets are emphasized rather than flows. The reason for this is that keeping track of stocks of assets is easier than dealing with flows. Correctly conducting analysis in terms of flows is very tricky, for example, when we encoun

12、ter inflation. Thus there are two reasons for using a stock approach rather than a flow approach: (1) it is easier, and (2) it is more consistent with modern treatment of asset markets by financial economists.Another important feature of this chapter is that it lays out supply and demand analysis of

13、 the bond market at a similar level to that found in principles of economics textbooks. The ceteris paribus derivations of supply and demand curves with numerical examples are presented, the concept of equilibrium is carefully developed, the factors that shift the supply and demand curves are outlin

14、ed, and the distinction between movements along a demand or supply curve and shifts in the curve is clearly drawn. My feeling is that the step-by-step treatment in this chapter is worthwhile because supply and demand analysis is such a basic tool throughout the study of financial markets and institu

15、tions. I have found that even those students who have had excellent training in earlier courses find that this chapter provides a valuable review of supply and demand analysis.An additional innovative feature of the book that first appears in this chapter are the special applications, “Case: the Wal

16、l Street Journal.” These cases show students how the analytical framework in the book can be used directly to understand the daily columns in the United States leading financial newspaper. The students particularly like the case on reading the credit markets column because it shows them that the con

17、cepts developed in the chapter are actually used in the real world. In teaching my class, I bring the previous days Wall Street Journal columns into class and then use them to conduct a case discussion along the lines of the “ Case: the Wall Street Journal “ in the text. My students very much like t

18、he resulting case discussions and have told me that they are better than case discussions in other classes because the material is so current.The Practicing Manager application at the end of the chapter shows how interest rate forecasts can be used by managers of financial institutions to increase p

19、rofits. This application shows students how the analysis they have learned is useful in the real world.This chapter has an extensive set of appendices on the web to enhance its material. Appendix 1 provides models of asset pricing in case and instructor wants to make use of the capital asset pricing

20、 model or the arbitrage pricing model in this course. Appendix 2 shows how the analysis developed in the chapter can be applied to understanding how any assets price is determined. Students particularly like the application to the gold market because this commodity piques almost everybodys interest.

21、 Appendix 3 provides an another interpretation of the supply and demand analysis for bonds using a different terminology involving the supply and demand for loanable funds. Appendix 4 provides an alternative approach to interest rate determination developed by John Maynard Keynes, known as the liqui

22、dity preference framework.Answers to End-of-Chapter Questions1.a.Less, because your wealth has declined;b.more, because its relative expected return has risen;c.less, because it has become less liquid relative to bonds;d.less, because its expected return has fallen relative to gold;e.more, because i

23、t has become less risky relative to bonds.2.a.More, because your wealth has increased;b.more, because it has become more liquid;c.less, because its expected return has fallen relative to Polaroid stock;d.more, because it has become less risky relative to stocks;e.less, because its expected return ha

24、s fallen.3.True, because the benefits to diversification are greater for a person who cares more about reducing risk.4.Purchasing shares in the pharmaceutical company is more likely to reduce my overall risk because the correlation of returns on my investment in a football team with the returns on t

25、he pharmaceutical company shares should be low. By contrast, the correlation of returns on an investment in a football team and an investment in a basketball team are probably pretty high, so in this case there would be little risk reduction if I invested in both.5.True, because for a risk averse pe

26、rson, more risk, a lower expected return and less liquidity make a security less desirable.6.When the Fed sells bonds to the public, it increases the supply of bonds, thus shifting the supply curve Bs to the right. The result is that the intersection of the supply and demand curves Bs and Bd occurs

27、at a lower equilibrium bond price and thus a higher equilibrium interest rate, and the interest rate rises. 7.When the economy booms, the demand for bonds increases: the publics income and wealth rises while the supply of bonds also increases, because firms have more attractive investment opportunit

28、ies. Both the supply and demand curves (Bd and Bs) shift to the right, but as is indicated in the text, the demand curve probably shifts less than the supply curve so the equilibrium interest rate rises. Similarly, when the economy enters a recession, both the supply and demand curves shift to the l

29、eft, but the demand curve shifts less than the supply curve so that the bond price rises and the interest rate falls. The conclusion is that bond prices fall and interest rates rise during booms and fall during recessions: that is, interest rates are procyclical.8.Interest rates fall. The increased

30、volatility of gold prices makes bonds relatively less risky relative to gold and causes the demand for bonds to increase. The demand curve, Bd, shifts to the right and the equilibrium bond price rises and the interest rate falls.9.Interest rates would rise. A sudden increase in peoples expectations

31、of future real estate pricesraises the expected return on real estate relative to bonds, so the demand for bonds falls. The demand curve Bd shifts to the left, and the equilibrium bond price falls, so the interest rate rises.10.Interest rates might rise. The large federal deficits require the Treasu

32、ry to issue more bonds; thus the supply of bonds increases. The supply curve, Bs, shifts to the right and the equilibrium bond price falls and the interest rate rises. Some economists believe that when the Treasury issues more bonds, the demand for bonds increases because the issue of bonds increase

33、s the publics wealth. In this case, the demand curve, Bd, also shifts to the right, and it is no longer clear that the equilibrium bond price or interest rate will rise. Thus there is some ambiguity in the answer to this question.11.The increased riskiness of bonds lowers the demand for bonds. The d

34、emand curve shifts to the left and the equilibrium bond price falls and the interest rate rises.12.The increased riskiness of bonds lowers the demand for bonds. The demand curve Bd shifts to the left, the equilibrium bond price falls and the interest rate rises. 13.Yes, interest rates will rise. The

35、 lower commission on stocks makes them more liquid than bonds, and the demand for bonds will fall. The demand curve Bd will therefore shift to the left, and the equilibrium bond price falls and the interest rate will rise.14If the public believes the presidents program will be successful, interest r

36、ates will fall. The presidents announcement will lower expected inflation so that the expected return on goods decreases relative to bonds. The demand for bonds increases and the demand curve, Bd, shifts to the right. For a given nominal interest rate, the lower expected inflation means that the rea

37、l interest rate has risen, raising the cost of borrowing so that the supply of bonds falls. The resulting leftward shift of the supply curve, Bs, and the rightward shift of the demand curve, Bd, causes the equilibrium bond price to rise and the interest rate to fall.15.The interest rate on the AT&T

38、bonds will rise. Because people now expect interest rates to rise, the expected return on long-term bonds such as the of 2022 will fall, and the demand for these bonds will decline. The demand curve Bd will therefore shift to the left, and the equilibrium bond price falls and the interest rate will

39、rise.16.Interest rates will rise. The expected increase in stock prices raises the expected return on stocks relative to bonds and so the demand for bonds falls. The demand curve, Bd, shift to the left and the equilibrium bond price falls and the interest rate rises.17.Interest rates will rise. When

40、 bond prices become volatile and bonds become riskier, the demand for bonds will fall. The demand curve Bd will shift to the left, and the equilibrium bond price falls and the interest rate will rise.Quantitative Problems1.You own a $1,000-par zero-coupon bond that has 5 years of remaining maturity.

41、 You plan on selling the bond in one year, and believe that the required yield next year will have the following probability distribution:ProbabilityRequired Yield0.16.60%0.26.75%0.47.00%0.27.20%0.17.45%a.What is your expected price when you sell the bond?b.What is the standard deviation?Solution:Pr

42、obabilityRequired YieldPriceProb PriceProb (Price Exp. Price)20.16.60%$774.41$ 77.4412.847762410.26.75%$770.07$154.01 9.7756681310.47.00%$762.90$305.16 0.0130175120.27.20%$757.22$151.44 6.8626095410.17.45%$750.02$ 75.0216.5903224$763.0746.08937999The expected price is $763.07.The variance is $46.09,

43、 or a standard deviation of $6.79.2.Consider a $1,000-par junk bond paying a 12% annual coupon. The issuing company has 20% chance of defaulting this year; in which case, the bond would not pay anything. If the company survives the first year, paying the annual coupon payment, it then has a 25% chan

44、ce of defaulting in the second year. If the company defaults in the second year, neither the final coupon payment nor par value of the bond will be paid. What price must investors pay for this bond to expect a 10% yield to maturity? At that price, what is the expected holding period return? Standard

45、 deviation of returns? Assume that periodic cash flows are reinvested at 10%.Solution:The expected cash flow at t1 0.20 (0) 0.80 (120) 96The expected cash flow at t2 0.25 (0) 0.75 (1,120) 840The price today should be: At the end of two years, the following cash flows and probabilities exist:Probabil

46、ityFinal Cash FlowHolding Period ReturnProb HPRProb (HPR Exp. HPR)20.2$ 0.00100.00%20.00%19.80%0.2$ 132.0083.11%16.62%13.65%0.6$1,252.0060.21%36.12%22.11%0.50%55.56%The expected holding period return is almost zero (0.5%). The standard deviation is roughly 74.5% the square root of 55.56%.3.Last mont

47、h, corporations supplied $250 billion in bonds to investors at an average market rate of 11.8%. This month, an additional $25 billion in bonds became available, and market rates increased to 12.2%. Assuming a Loanable Funds Framework for interest rates, and that the demand curve remained constant, d

48、erive a linear equation for the demand for bonds, using prices instead of interest rates.Solution:First, translated the interest rates into prices.We know two points on the demand curve:P 891.266, Q 275P 894.454, Q 250So, the slope Using the point-slope form of the line, Price -0.12755 Quantity Cons

49、tant. We can substitute in either point to determine the constant. Lets use the first point:891.266 -0.12755 275 constant,orconstant 926.334Finally, we have:Bd: Price 0.12755 Quantity 856.1894.An economist has estimated that, near the point of equilibrium, the demand curve and supply curve for bonds can be estimated using the following equations:Bd: Price Bs: Price Quantity 500a.What is the expected equilibrium price and quantity of bonds in this market?b.Given your answer to part a., which is the expected interest rate in this marke