商业银行管理Chap007.pptVIP

Interest Rate Risk: One of the Greatest Management Challenges (continued) Forces Determining Interest Rates Loanable Funds Theory The Measurement of Interest Rates YTM Bank Discount Components of Interest Rates EXHIBIT 7–2 Determination of the Rate of Interest in the Financial Marketplace Where the Demand and Supply of Loanable Funds (Credit) Interact to Set the Price of Credit Interest Rate Risk: One of the Greatest Management Challenges (continued) Interest rates are the price of credit Demanded by lenders as compensation for the use of borrowed funds Expressed in percentage points and basis points (1/100 of a percentage point) Yield to Maturity (YTM) The discount rate that equalizes the current market value of a loan or security with the expected stream of future income payments that the loan or security will generate Interest Rate Risk: One of the Greatest Management Challenges (continued) How to Calculate the Yield to Maturity Interest Rate Risk: One of the Greatest Management Challenges (continued) Another popular interest rate measure is the bank discount rate (DR) Often quoted on short-term loans and money market securities (such as Treasury bills) Interest Rate Risk: One of the Greatest Management Challenges (continued) The DR measure ignores the effect of compounding and is based on a 360-day year Unlike the YTM measure, which assumes a 365-day year and assumes that interest income is compounded at the calculated YTM The DR measure uses the face value of a financial instrument to calculate its yield or rate of return Makes calculations easier but is theoretically incorrect The purchase price of a financial instrument is a much better base to use in calculating the instrument’s true rate of return Interest Rate Risk: One of the Greatest Management Challenges (continued) To convert a DR to the equivalent yield to maturity, we can use the formula Interest Rate Risk: One of the Greatest Management Challenges (continued) Market interest rates are a f