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1、3,Structure of Interest Rates,Chapter Objectives,Learn why individual securitys yield differ or why security prices vary or changeAnalyze theories explaining why rates vary by term or maturity, called the term structure of interest rates,Yield,What is yield? The income return on an investment. This
2、refers to the interest or dividends received from a security and is usually expressed annually as a percentage based on the investments cost, its current market value or its face value. For example, there are two stock dividend yields. If you buy a stock for $30 (cost basis) and its current price an
3、d annual dividend is $33 and $1, respectively, the “cost yield“ will be 3.3% ($1/$30) and the “current yield“ will be 3% ($1/$33).,Yield,Types of yield Bonds have four yields: coupon (the bond interest rate fixed at issuance), current (the bond interest rate as a percentage of the current price of t
4、he bond), and yield to maturity (an estimate of what an investor will receive if the bond is held to its maturity date). Non-taxable municipal bonds will have a tax-equivalent (TE) yield determined by the investors tax bracket.,Yield,Types of yield Mutual fund yields are an annual percentage measure
5、 of income (dividends and interest) earned by the funds portfolio, net of the funds expenses. In addition, the “SEC yield“ is an indicator of the percentage yield on a fund based on a 30-day period.,Yield to Maturity,What is yield to maturity The rate of return anticipated on a bond if it is held un
6、til the maturity date. YTM is considered a long-term bond yield expressed as an annual rate. The calculation of YTM takes into account the current market price, par value, coupon interest rate and time to maturity. It is also assumed that all coupons are reinvested at the same rate. Sometimes this i
7、s simply referred to as “yield” for short.,收益率. 到期收益率,收益率收益率是指投资的收益率，一般以年度百分比表达，根据当时市场价格、面值、息票利率以及距离到期日时间计算。对公司而言，收益率指净利润占使用的平均资本的百分比。 到期收益率 投资人按当前市价买进债券，如期收到全部利息和赎回本金，并一直持有至债券到期可获得的回报率即是到期收益率。将债券未来的现金流以到期收益率折现为现值，会等于债券的市价。到期收益率的计算内含一个假设，即到期前收到的全部利息均按到期收益率再投资。,Difference between interest rates and y
8、ield,Rate is the specified interest rate paid on a financial instrument (such as a bond). The interest is calculated by applying the rate to the face value of the instrument. The yield is calculated by dividing the interest amount received by the price paid for the investment, and the time held. So,
9、 if you bought a bond at a discounted price (below the face value), your yield would be higher than the rate.,Difference between interest rates and yield,You buy a bond on Jan 1 with a face value of $1,000 and a stated rate of 5% (annual interest payment) at the discounted price of $950. On Dec 31,
10、you receive $50 in interest (1,000 x 5%) which gives you a 5.26% yield (50/950). Or, if you bought a bond for face value close to the coupon date, your yield would be higher than the rate. On July 1, you pay the face value of $1,000 for a bond with a stated rate of 5% and which matures on 12/31. You
11、 receive $1,050 , a $50 yield for 6 mos., for a 10% annual yield.,1. Factors Affecting Security Yields,Risk-averse investors demand higher yields for added riskiness Risk is associated with variability of returns Increased riskiness generates lower security prices or higher investor required rates o
12、f return,Factors Affecting Security Yields,Security yields and prices are affected by levels and changes in: Default risk (also called Credit Risk) Liquidity Tax status Term to maturity Special contract provisions such as embedded options,1.1 Factors Affecting Security Yields-Credit (default) Risk,C
13、redit risk-which is especially relevant for longer-term securities that expose creditors to the possibility of default for longer time Rating agencies: Moodys Investor Service; Standard and Poors Corporation; and Fitch Ratings The ratings are based on a financial assessment of the issuing corporatio
14、n. The higher the rating, the lower the perceived credit risk,1.1 Factors Affecting Security Yields-Credit (default) Risk,Benchmarkrisk-free treasury securities for given maturity Default risk premium = risky security yield treasury security yield of same maturity Default risk premium = market expec
15、ted default loss rate Anticipated or actual ratings changes impact security prices and yields Risk perception, especially during market crash, also impact security prices and yields (Exhibit 3.2),1.2 Factors Affecting Security Yields-Liquidity,The Liquidity of a security affects the yield/price of t
16、he security A liquid investment is easily converted to cash at minimum transactions cost Investors pay more (lower yield) for liquid investment Liquidity is associated with short-term, low default risk, marketable securities,1.3 Factors Affecting Security Yields-Tax Status,Tax status of income or gain on security impacts the security yield Investor concerned with after-tax return or yield Investors require higher yields For higher taxed securities,Factors Affecting Security Yields,
