tailieunhanh - Lecture Financial markets and institutions - Chapter 3: Structure of interest rates

In this chapter, you learned to: Characteristics of debt securities that cause their yields to vary, explaining actual yield differentials, estimating the appropriate yield, a closer look at the term structure, international structure of interest rates. | Chapter 3 Structure of Interest Rates Financial Markets and Institutions, 7e, Jeff Madura Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Chapter Outline Characteristics of debt securities that cause their yields to vary Explaining actual yield differentials Estimating the appropriate yield A closer look at the term structure International structure of interest rates Characteristics of Debt Securities Credit (default) risk Securities with a higher degree of risk have to offer higher yields to be chosen Credit risk is especially relevant for longer-term securities Investors must consider the creditworthiness of the security issuer Can use bond ratings of rating agencies The higher the rating, the lower the perceived credit risk Ratings can change over time as economic conditions change Ratings for different bond issues by the same issuer can vary Characteristics of Debt Securities (cont’d) Credit (default) risk (cont’d) Rating agencies Moody’s Investor Service and Standard and Poor’s Corporation are the most popular Agencies use different methods to assess the creditworthiness of firms and state governments A particular bond issue could have different ratings from each agency, but differences are usually small Financial institutions may be required to invest only in investment-grade bonds rated Baa or better by Moody’s and BBB or better by Standard and Poor’s Characteristics of Debt Securities (cont’d) Ratings Assigned by: Description of Security Moody’s Standard and Poor’s Highest quality Aaa AAA High quality Aa AA High-medium quality A A Medium quality Baa BBB Medium-low quality Ba BB Low quality (speculative) B B Poor quality Caa CCC Very poor quality Ca CC Lowest quality (in default) C DDD, D Characteristics of Debt Securities (cont’d) Credit (default) risk (cont’d) Shifts in credit risk premiums The risk premium corresponding to a particular bond rating can chance over time Accuracy of credit ratings In . | Chapter 3 Structure of Interest Rates Financial Markets and Institutions, 7e, Jeff Madura Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Chapter Outline Characteristics of debt securities that cause their yields to vary Explaining actual yield differentials Estimating the appropriate yield A closer look at the term structure International structure of interest rates Characteristics of Debt Securities Credit (default) risk Securities with a higher degree of risk have to offer higher yields to be chosen Credit risk is especially relevant for longer-term securities Investors must consider the creditworthiness of the security issuer Can use bond ratings of rating agencies The higher the rating, the lower the perceived credit risk Ratings can change over time as economic conditions change Ratings for different bond issues by the same issuer can vary Characteristics of Debt Securities (cont’d) Credit (default) risk (cont’d) Rating agencies .