《金融市场与机构 Jeff Madura》ch03.pptVIP

3 Structure of Interest Rates Chapter Objectives Learn why individual interest rates differ or why security prices vary or change Analyze theories explaining why rates vary by term or maturity, called the term structure of interest rates Factors Affecting Security Yields Risk-averse investors demand higher yields For added riskiness Risk is associated with variability Of returns Increased riskiness generates lower security prices or higher investor required rates of return Factors Affecting Security Yields Security yields and prices are affected by levels and changes in: Default risk (also called Credit Risk) Liquidity Tax status Term to maturity Special contract provisions such as embedded options Factors Affecting Security Yields Benchmark—risk-free treasury securities for given maturity Default risk premium = risky security yield – treasury security yield of same maturity Default risk premium = market expected default loss rate Rating agencies set default risk ratings Anticipated or actual ratings changes impact security prices and yields Factors Affecting Security Yields The Liquidity of a security affects the yield/price of the security A liquid investment is easily converted to cash At minimum transactions cost Investors pay more (lower yield) for liquid investment Liquidity is associated with short-term, low default risk, marketable securities Factors Affecting Security Yields Tax status of income or gain on security impacts the security yield Investor concerned with after-tax return or yield Investors require higher yields For higher taxed securities Factors Affecting Security Yields Yat = Ybt(1 – T) Where: Yat = after-tax yield Ybt = before-tax yield T = investor’s marginal tax rate Factors Affecting Security Yields Example: a taxable security that offers a before-tax yield of 14 percent. The investor’s tax rate is 20 percent. Calculate the after-tax yield. Yat = 14%(1 – 0.2) = 11.2% The fully taxable pre-tax equivalent corporate bond fo