[经济学]AISE_FIM7e_ch03.ppt

Chapter 3 Interest Rates Structure Chapter Outline Why debt security yields vary Explaining actual yield differentials Estimating the appropriate yield A closer look at the term structure Interest rates: International structure Why Debt Security Yields Vary Credit (default) risk Securities with a higher degree of risk have to offer higher yields to be chosen Credit risk is especially relevant for longer-term securities Investors must consider the creditworthiness of the security issuer Can use bond ratings of rating agencies The higher the rating, the lower the perceived credit risk Ratings can change over time as economic conditions change Ratings for different bond issues by the same issuer can vary Why Debt Security Yields Vary (cont’d) Credit (default) risk (cont’d) Rating agencies Moody’s Investor Service and Standard and Poor’s Corporation are the most popular Agencies use different methods to assess the creditworthiness of firms and state governments A particular bond issue could have different ratings from each agency, but differences are usually small Financial institutions may be required to invest only in investment-grade bonds rated Baa or better by Moody’s and BBB or better by Standard and Poor’s Why Debt Security Yields Vary (cont’d) Why Debt Security Yields Vary (cont’d) Credit (default) risk (cont’d) Shifts in credit risk premiums The risk premium corresponding to a particular bond rating can chance over time Accuracy of credit ratings In general, credit ratings have served as reasonable indicators of the likelihood of default Credit rating agencies do not always detect financial problems of firms Why Debt Security Yields Vary (cont’d) Liquidity Liquid securities can be easily converted to cash without a loss in value Short-maturity securities with an active secondary market are liquid Securities with lower liquidity have to offer a higher yield to be preferred Why Debt Security Yields Vary (cont’d) Tax status Investors are more concerned wit