tailieunhanh - Lecture Money and capital markets: Chapter 8 – Peter S. Rose, Milton H.Marquis

The goals of this chapter are: To try to make sense of the stock market, to show what fluctuations in stock value mean for individuals and for the economy as a whole, to look at a critical connection between the financial system and the real economy, explain why we sometimes have bubbles and crashes. | Chapter 8 The Risk Structure of Interest Rates: Defaults, Prepayments, Taxes, and Other Rate-Determining Factors Learning Objectives To see the effects of financial assets’ marketability, liquidity, default risk, call privileges, prepayment risk, convertibility and taxability upon their interest rates and prices. 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. Learning Objectives To see why it is so difficult to forecast interest rates and financial asset prices accurately. 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 income, prepayment risk, convertibility. Marketability Marketability – Can an asset be sold quickly? . | Chapter 8 The Risk Structure of Interest Rates: Defaults, Prepayments, Taxes, and Other Rate-Determining Factors Learning Objectives To see the effects of financial assets’ marketability, liquidity, default risk, call privileges, prepayment risk, convertibility and taxability upon their interest rates and prices. 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. Learning Objectives To see why it is so difficult to forecast interest rates and financial asset prices accurately. 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 income, prepayment risk, convertibility. Marketability 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 Liquidity – A liquid financial asset is readily marketable. Moreover, its price tends to be stable over time and it is reversible. Popular measures of liquidity include the bid-ask spread, trading volume, frequency of trades, and average trade size. Default Risk and Interest Rates Default risk – The risk that a borrower will not make all the promised payments at the agreed-upon times. Promised yield on a risky asset = risk-free interest rate + default risk premium The promised yield on a risky debt security is the yield to maturity that will be earned by the investor if the borrower makes all promised payments when they are due. Default Risk and Interest Rates Default Risk and Interest Rates Among the leading . bankruptcy filers in modern history are WorldCom, Enron,