【正文】 / Irwin 7 40 Inflation and Interest Rates Impact of Price Deflation ? There is growing concern that deflation – a fall in the average level of prices – may soon replace inflation as one of the key problems that nations may face in the future. ? Past experiences indicate that price deflation can result in lower output (production) of goods and services, and force real interest rates upward. ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 7 41 Inflation and Interest Rates Inflation and Stock Prices ? Common stock is widely viewed as a hedge against inflation. ? However, research evidence seem to support the view that the impact of inflation on stock prices varies from firm to firm and from industry to industry depending on the actual rate of inflation and the terms of existing nominal contracts. ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 7 42 InflationAdjusted Securities ? The . Treasury offers TIPS (Treasury Inflation Protected Securities) and “I bonds” for investors who want some protection against inflation. ? Annual nominal interest payment from a TIPS = inflationadjusted ? promised nominal value coupon rate ? When the public expects higher inflation, inflationadjusted securities rise in value. ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 7 43 InflationAdjusted Securities Source: Economic Trends, Federal Reserve Bank of Cleveland, June amp。Money and Capital Markets 7 C h a p t e r Eighth Edition Financial Institutions and Instruments in a Global Marketplace Peter S. Rose McGraw Hill / Irwin Slides by YeeTien (Ted) Fu The Impact of Inflation amp。 July 2020 ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 7 44 The Maturity of a Loan ? One important factor causing interest rates to differ from one another is differences in the maturity (or term) of securities and loans. ? The relationship between the rates of return on financial instruments and their maturity is called the term structure of interest rates. ? This term structure may be represented visually by drawing a yield curve for all securities having the same credit quality. ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 7 45 Source: Economic Trends, Federal Reserve Bank of Cleveland, June 2020 The Maturity of a Loan ? Yield curves may be upward sloping, downward sloping, or horizontal (flat). ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 7 46 The Maturity of a Loan ? The unbiased expectations hypothesis argues that investor expectations regarding future changes in shortterm interest rates determine the shape of the curve. ? Thus, changes in the relative amounts of longterm and shortterm securities will not affect the shape of the yield curve unless investor expectations are also affected. ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 7 47 The Maturity of a Loan ? The liquidity premium view of the yield curve suggests that there is a bias toward positivelysloped yield curves. ? Longerterm securities tend to have more volatile market prices and hence, greater risk of capital loss. ? So, investors must be paid an interest rate premium (the liquidity premium) to encourage them to purchase longterm securities. ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 7 48 The Maturity of a Loan ? The market segmentation argument of the yield curve separates the financial markets into several distinct markets according to the maturity preferences of the investors. ? The implication is that governments can alter the shape of the yield curve by shifting the available supplies of securities relative to the demand for those securities in each distinct market. ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 7 49 The Maturity of a Loan ? The preferred habitat or posite theory of the yield curve argues that investors seek out their preferred habitat – they choose securities that match their risk preferences, tax exposure, liquidity needs, regulatory requirements, and planned holding periods. ? An investor will not normally stray from his or her preferred habitat unless the rates of return on some other securities are high enough to overe his or her preferences. ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 7 50 The Maturity of a Loan ? Empirical studies on the various yield curve theories have produced mixed results. ? As such, the traditional models are giving way today to newer models that are being created in response to recent theoretical developments – in particular, the BlackScholes option pricing formula and the rational expectations theory. ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 7 51 The Maturity of a Loan ?The yield curve is a useful tool for … ? forecasting interest rates – a downwardsloping yield curve suggests nearterm declines in rate