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Interest Rate Structure

In: Business and Management

Submitted By camelia3963
Words 2352
Pages 10
Part 2 – Chapter 4 The Risk and Term Structure of Interest Rates

Two ques3ons about interest rates of bonds ¤ Why bonds with the same maturity have different yields/ interest rates?

=> Risk structure of interest rates ¤ Why bonds with iden3fied characteris3cs have different yields/ interest rates? => Term structure of interest rates

FIGURE 1 Long-­‐Term Bond Yields, 1919– 2008

Sources: Board of Governors of the Federal Reserve System, Banking and Monetary Sta4s4cs, 1941–1970; Federal Reserve: www.federalreserve.gov/releases/h15/data.htm.

Risk Structure of Interest Rates ¤ Bonds with the same maturity have different interest rates due to they have different characteris3cs of: ¤ Default risk ¤ Liquidity ¤ Tax considera3ons/ tax status ¤ Special provisions

Default risk ¤ Default (credit) risk: probability that the issuer of the bond is unable or unwilling to make interest payments or pay off the face value ¤ Securi3es with a higher degree of risk have to offer higher yields to be chosen ¤ Credit risk is especially relevant for longer-­‐term securi3es ¤ Investors must consider the creditworthiness of the security issuer...

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