FMI7e_ch03Structure of Interest Rates(金融市场好机构—7e, by Jeff Madura)).pdf

Chapter 3 Structure of Interest Rates Financial Markets and Institutions, 7e, Jeff Madura Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. 1 Chapter Outline  Characteristics of debt securities that cause their yields to vary  Explaining actual yield differentials  Estimating the appropriate yield A closer look at the term structure  International structure of interest rates 2 Characteristics of Debt Securities  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 3 Characteristics of Debt Securities (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 S