【正文】 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。 Deflation, Yield Curves, and Duration on Interest Rates and Asset Prices ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 7 2 Money and Capital Markets 8 C h a p t e r Eighth Edition Financial Institutions and Instruments in a Global Marketplace Peter S. Rose Slide by YeeTien (Ted) FuMarketability, Default Risk, Call Privileges, Prepayment Risk, Taxes, and Other Factors Affecting Interest Rates ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 7 3 ? Learning Objectives ? ? To see the effects of the marketability, default risk, liquidity, call privileges, prepayment risk, convertibility and taxability of various loans and securities upon their interest rates. ? To understand why there are so many different interest rates within the global economy. ?To learn how the “structure of interest rates” is built and why it changes constantly. ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 7 4 ? Learning Objectives ? ? To appreciate the difficulties of forecasting interest rates and financial asset prices accurately. ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 7 5 Introduction ? In the preceding chapter, we examined how expected inflation and security maturity affect interest rates. ? In this chapter, we will look at how some other factors influence interest rates: ? marketability, ? default risk, ? call privileges, ? taxation of security ine, ? prepayment risk, and ? convertibility. ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 7 6 Marketability and Liquidity ? Marketability – Can an asset be sold quickly? ? Marketability is positively related to the size and reputation of the institution issuing the securities and to the number of similar securities outstanding. However, marketability is negatively related to yield. ? Liquidity – A liquid financial asset is readily marketable. Moreover, its price tends to be stable and reversible. ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 7 7 Default Risk ? Default risk – The risk that a borrower will not make all the promised payments at the agreedupon times. ? Promised yield on a risky asset = riskfree interest rate + default risk premium ? Expected yield on a risky asset = S piyi pi = probability that the ith possible yield, yi, occurs ? Anticipated default loss on a risky asset = promised yield – expected yield ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 7 8 Default Risk Source: Economic Trends, Federal Reserve Bank of Cleveland, July 2020 ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 7 9 Default Risk Factors Influencing Default Risk Premiums ? Credit ratings by rating panies such as Moody’s and Standard amp。 Poor’s ? Highlyrated securities are perceived as having negligible default risk. ? Fluctuations (cycles) in business activity ? The yield spread between Aaa and Baarated securities increases during economic recessions. ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 7 10 Default Risk Average Yields (% per annum) 45678910111990 1992 1994 1996 1998 2020 2020Baa Corporate Bonds Aaa Corporate Bonds 10year Treasury Bonds 30year Treasury Bonds Data Source: Board of Governors of the Federal Reserve System ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 7 11 Default Risk ? For corporate securities, the period of time the firm has been in operation, variability in pany earnings, and the amount of leverage employed ? Inflation ? Default risk premiums tend to be higher and more volatile when inflation is high and volatile. Factors Influencing Default Risk Premiums ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 7 12 Default Risk The JunkBond Spread and the Economy ? Junk bond spread = junk bond yields – Aaa corporate bond yields ? A rise in the junk bond spread indicates a growing fear among bond market investors that marginalquality corporate borrowers are more likely to default on their debts (. a weakening economy). ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 7 13 Default Risk New Ways of Dealing with Default Risk ? Credit derivatives are financial contracts that seek to protect lenders against default risk by shifting that risk to someone else willing to accept it for a fee. ? In a credit swap, two or more lenders agree to exchange a portion of their expected payments. ? A credit option may enable the lender to be reimbursed if a credit asset begins to lose value. ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 7 14 Call Privileges ? A cal