【正文】 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 Rates An Example During the month of January 2020 … The longterm . Treasury bond rate averaged % The corporate Baa bond rate averaged % while + % = Real riskfree rate +% Expected inflation +% Liquidity premium +% Total = % Premiums for: ? marketability +% Call risk +% Default risk +% Total = % ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 7 28 Money and Capital Markets in Cyberspace ? The world wide web addresses a number of the foregoing issues at a variety of websites: ? ? ? ? ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 7 29 Chapter Review ? Introduction ? Marketability and Liquidity ? Default Risk ? The Premium for Default Risk ? The Expected Rate of Return on a Risky Asset ? Anticipated Default Loss ? Factors Influencing Default Risk Premiums ? The JunkBond Spread and the Economy ? New Ways of Dealing with Default Risk ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 7 30 Chapter Review ? Call Privileges ? Advantages and Disadvantages ? The Call Premium ? Prepayment Risk on LoanBacked Securities ? Taxation of Security Returns ? Comparing Taxable and TaxExempt Securities ? Convertible Securities ? The Structure of Interest Rates ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 7 31 ? Learning Objectives ? ? To learn what inflation is and how it can impact interest rates and asset prices. ? To understand the greater concern today over deflation and how deflation may affect the economy and financial system. ? To see how yield curves arise and explore the ideas about what determines the shape of the yield curve at any point in time. ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 7 32 ? Learning Objectives ? ? To discover how yield curves can be a useful tool for those interested in investing their money and in tracking the health of the economy. ? To look at the concept of duration and see how it can assist in the making of investment choices and in protecting against the risk of changing interest rates. ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 7 33 Inflation and Interest Rates ? Inflation refers to the rise in the average level of prices for all goods and services. ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 7 34 Inflation and Interest Rates ? In recent years, the . inflation and interest rates appear to be fairly strongly correlated. 1960 % % % 1970 1980 1990 2020 2020 Year Rate of Inflation (% D) CPI GDP Deflator 6month Tbill Rate (secondary market) ? 2020 by The McGrawHill Companies, Inc. All rights reserved. McGraw Hill / Irwin 7 35 Inflation and