Bonds, Bond Prices, and the Determination of Interest Rates推荐.pdfVIP

Chapter 6 Bonds, Bond Prices, and the Determination of Interest Rates Learning Objectives Understand . . . LO1 Present value and bond pricing LO2 Relationship of prices, yields, and returns LO3 Key drivers of bond prices LO4 Risks of default, inflation, and interest rate changes Virtually any i nancial arrangement involving the current transfer of resources from a lender to a borrower, with a transfer back at some time in the future, is a form of bond. Car loans, home mortgages, even credit card balances all create a loan from a i nancial intermediary to an individual making a purchase—just like the bonds governments and large corporations sell when they need to borrow. When companies like Ford, General Electric, or Walmart need to i nance their opera- tions, they sell bonds. When the U.S. Treasury or a state government needs to borrow, it sells bonds. And they do it billions of dollars at a time. Following the i nancial crisis of 2007– 2009, U.S. corporations tried to reduce their debt, but their bonds outstanding remained above $10 trillion as of 2012. Federal, state, and local American governments have nearly $15 trillion in outstanding debt as well.1 The ease with which individuals, corporations, and governments borrow is essential to the functioning of our economic system. Without this free l ow of resources through the bond markets, the economy would freeze up. Historically, we can trace the concept of using bonds to borrow to monarchs’ almost insatiable appetite for resources. To maintain lavish lifestyles, i ght wars, and explore the globe, kings, princes, and other rulers drew on every available source of i nancing. Even with these incentives, after thousands of years of civilization only a few pos- sibilities had been developed: outright coni scation; taxation, which is a mild form of coni scation; debasement of currency, in which people are required to exchange their coins for ones t