【正文】 ately, or the privilege may be deferred for a specified period of time. ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 7 15 Call Privileges Advantages and Disadvantages ? The call option is an advantage to the security issuer because it grants greater financial flexibility and the potential for reducing future interest costs. ? However, it is a disadvantage to the security buyer. The holdingperiod yield may decline if the security is called, and the potential for capital gains is limited. ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 7 16 Call Privileges The Call Premium ? Issuers of callable securities must pay a call premium in the form of a higher interest rate. ? The call premium is higher if ?the market expects interest rates to fall (such that the call risk is higher), ?the call deferment period is shorter, and ?the call price is lower. ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 7 17 Prepayment Risk on LoanBacked Securities ? Prepayment risk is the risk that the purchaser may receive higherthanexpected repayments of principal early in the life of loanbacked securities. ? Prepayment risk is especially valid for the investors in securities that are backed by home mortgage loans, as many home loans will be retired early due to loan refinancing and homeowner turnover. ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 7 18 Prepayment Risk on LoanBacked Securities ?Since prepayments may lower the investor’s return, loanbacked securities with greater prepayment risks are priced lower. ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 7 19 Taxation of Security Returns ? Taxes imposed by the federal, state, and local governments can have a profound effect on the returns earned by investors on financial assets. ? Thus, governments can use their taxing power to encourage the investment in certain financial assets, thereby redirecting the flow of savings and investment toward areas of critical social need. ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 7 20 Taxation of Security Returns ? In particular, governments may ? vary the ine brackets and tax rates ? tie the applicable tax rates to the length of time that securities were held ? grant certain amounts of tax exemptions for various categories ? enable the deduction of capital losses (up to specified limits) ? change the permissible annual contributions to educational or retirement accounts ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 7 21 Taxation of Security Returns A Brief History of Marginal Ine Tax Rates Source: Economic Trends, Federal Reserve Bank of Cleveland, January 2020 ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 7 22 Taxation of Security Returns ? Taxexempt securities represent a subsidy to induce investors to support local governments. ? The exemption privilege shifts the burden of federal taxation from buyers of municipal bonds to other taxpayers. ? However, the privilege lowers the interest rates at which municipals can be sold in the open market relative to parable taxable bonds. ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 7 23 Taxation of Security Returns ? Aftertax yield = (1 – t ) ? Beforetax yield where t is the investor’s marginal tax rate ? An investor will be indifferent between taxable and taxexempt securities when Taxexempt yield = (1 – t ) ? Taxable yield ? To make valid parisons between taxable and taxexempt issues, the taxed investor should convert all expected yields to an aftertax basis. ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 7 24 Convertible Securities ? Convertible (or hybrid) securities are special issues of corporate bonds or preferred stock that can be exchanged for a specific number of shares of the issuing firm’s mon stock. ? Convertibles offer the investor the prospect of a stable interest or dividend ine, as well as capital gains on mon stock on conversion. ? Hence, investors are generally willing to pay a premium for convertibles. ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 7 25 Convertible Securities ? Note that the issuer may call in the securities early, forcing conversion. ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 7 26 The Structure of Interest Rates ? The riskfree interest rate underlies all interest rates and is a ponent of all rates. ? All other interest rates are scaled upward by varying degrees from the riskfree rate, depending on such factors as inflation, the term (maturity) of a loan, the risk of borrower default, the risk of prepayment, and the marketability, liquidity, convertibility, and tax status of the securities to which those rates apply. ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 7 27 The Structure of Interest