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1、 CHAPTER5TheFinancialEnvironment Markets Institutions andInterestRates FinancialmarketsTypesoffinancialinstitutionsDeterminantsofinterestratesYieldcurves DefineTheseMarkets MarketsingeneralPhysicalassetsFinancialassetsMoneyvs CapitalPrimaryvs SecondarySpotvs Future DirecttransferInvestmentbankinghou
2、seFinancialintermediary ThreePrimaryWaysCapitalIsTransferredBetweenSaversandBorrowers BankNameCountryTotalassetsDeutscheBankAGGermany 735billionUBSGroupSwitzerland 687billionCitigroupUnitedStates 669billionBankofAmericaUnitedStates 618billionBankofTokyoJapan 580billion TheTop5BankingCompaniesintheWo
3、rld 1999 PhysicalLocationStockExchangesvs ElectronicDealer BasedMarkets Auctionmarketvs Dealermarket Exchangesvs OTC NYSEvs NasdaqsystemDifferencesarenarrowing Whatdowecalltheprice orcost ofdebtcapital TheinterestrateWhatdowecalltheprice orcost ofequitycapital RequiredDividendCapitalreturnyieldgain
4、Whatfourfactorsaffectthecostofmoney ProductionopportunitiesTimepreferencesforconsumptionRiskExpectedinflation Real Versus Nominal Rates k Realrisk freerate T bondrateifnoinflation 1 to4 Anynominalrate RateonTreasurysecurities k kRF k k IP DRP LP MRP Here k requiredrateofreturnonadebtsecurity k realr
5、isk freerate IP inflationpremium DRP defaultriskpremium LP liquiditypremium MRP maturityriskpremium PremiumsAddedtok forDifferentTypesofDebt S TTreasury onlyIPforS TinflationL TTreasury IPforL Tinflation MRPS Tcorporate S TIP DRP LPL Tcorporate IP DRP MRP LP Whatisthe termstructureofinterestrates Wh
6、atisa yieldcurve Termstructure therelationshipbetweeninterestrates oryields andmaturities Agraphofthetermstructureiscalledtheyieldcurve TreasuryYieldCurve 0 5 10 15 10 20 30 YearstoMaturity InterestRate 1yr5 2 5yr5 8 10yr5 9 30yr6 0 YieldCurve August1999 YieldCurveConstruction Step1 Findtheaverageex
7、pectedinflationrateoverYears1ton IPn n Suppose thatinflationisexpectedtobe5 nextyear 6 thefollowingyear and8 thereafter IP1 5 1 0 5 00 IP10 5 6 8 8 10 7 50 IP20 5 6 8 18 20 7 75 MustearntheseIPstobreakevenvs inflation theseIPswouldpermityoutoearnk beforetaxes Step2 FindMRPBasedonThisEquation MRPt 0
8、1 t 1 MRP1 0 1 x0 0 0 MRP10 0 1 x9 0 9 MRP20 0 1 x19 1 9 Step3 AddtheIPsandMRPstok kRFt k IPt MRPt kRF Quotedmarketinterestrateontreasurysecurities Assumek 3 kRF1 3 0 5 0 0 0 8 0 kRF10 3 0 7 5 0 9 11 4 kRF20 3 00 7 75 1 90 12 65 HypotheticalTreasuryYieldCurve 0 5 10 15 1 10 20 YearstoMaturity Intere
9、stRate 1yr8 0 10yr11 4 20yr12 65 Realrisk freerate Inflationpremium Maturityriskpremium Whatfactorscanexplaintheshapeofthisyieldcurve Thisconstructedyieldcurveisupwardsloping Thisisduetoincreasingexpectedinflationandanincreasingmaturityriskpremium WhatkindofrelationshipexistsbetweentheTreasuryyieldc
10、urveandtheyieldcurvesforcorporateissues CorporateyieldcurvesarehigherthanthatoftheTreasurybond However corporateyieldcurvesarenotneces sarilyparalleltotheTreasurycurve ThespreadbetweenacorporateyieldcurveandtheTreasurycurvewidensasthecorporatebondratingdecreases HypotheticalTreasuryandCorporateYield
11、Curves 0 5 10 15 0 1 5 10 15 20 Yearstomaturity InterestRate 5 2 5 9 6 0 Treasuryyieldcurve HowdoesthevolumeofcorporatebondissuescomparetothatofTreasurysecurities Recently thevolumeofinvestmentgradecorporatebondissueshasovertakenTreasuryissues 95 96 97 98 99 600450300150 GrossU S TreasuryIssuance in
12、blue InvestmentGradeCorporateBondIssuance inred Billionsofdollars ThePureExpectationsHypothesis PEH Shapeoftheyieldcurvedependsontheinvestors expectationsaboutfutureinterestrates Ifinterestratesareexpectedtoincrease L TrateswillbehigherthanS Tratesandviceversa Thus theyieldcurvecanslopeupordown PEHa
13、ssumesthatMRP 0 Long termratesareanaverageofcurrentandfutureshort termrates IfPEHiscorrect youcanusetheyieldcurveto backout expectedfutureinterestrates ObservedTreasuryRates Maturity1year2years3years4years5years Yield6 0 6 2 6 4 6 5 6 5 IfPEHholds whatdoesthemarketexpectwillbetheinterestrateonone ye
14、arsecurities oneyearfromnow Three yearsecurities twoyearsfromnow 0 1 2 5 6 0 3 4 x 6 2 PEHtellsusthatone yearsecuritieswillyield6 4 oneyearfromnow x 6 2 12 4 6 0 x 6 4 x 6 0 x 2 0 1 2 5 6 2 3 4 x 6 5 2 6 2 3 x 5 PEHtellsusthatthree yearsecuritieswillyield6 7 twoyearsfromnow x 6 5 32 5 12 4 3 x 20 1
15、3 x 6 7 x SomearguethatthePEHisn tcorrect becausesecuritiesofdifferentmaturitieshavedifferentrisk Generalview supportedbymostevidence isthatlenderspreferS Tsecurities andviewL Tsecuritiesasriskier Thus investorsdemandaMRPtogetthemtoholdL Tsecurities i e MRP 0 ConclusionsaboutPEH Whatvarioustypesofri
16、sksarisewheninvestingoverseas Countryrisk Arisesfrominvestingordoingbusinessinaparticularcountry Itdependsonthecountry seconomic political andsocialenvironment Exchangeraterisk Ifinvestmentisdenominatedinacurrencyotherthanthedollar theinvestment svaluewilldependonwhathappenstoexchangerate TwoFactorsLeadtoExchangeRateFluctuations 1 Changesinrelativeinflationwillleadtochangesinexchangerates 2 Anincreaseincountryriskwillalsocausethatcountry scurrencytofall
