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1、Chapter 6TheRiskandTermStructureofInterestRatesOutline Examining the relationship of the various interest rates to one another Risk structure of interest rates Why Bond with same term to maturity have difference interest rates Term structure of interest ratesThe relationship among interest rates on
2、bonds with different terms to maturity Copyright2007PearsonAddison-Wesley.Allrightsreserved.6-3Interest rates on difference categories of bonds differ from one another in any given year The spread between the interest rates varies over time Risk Structure of Interest Rates Copyright2007PearsonAddiso
3、n-Wesley.Allrightsreserved.6-4Risk Structure of Interest RatesDefault riskoccurs when the issuer of the bond is unable or unwilling to make interest payments or pay off the face valueU.S. T-bonds are considered default freeRisk premiumthe spread between the interest rates on bonds with default risk
4、and the interest rates on T-bonds Liquiditythe ease with which an asset can be converted into cashIncome tax considerationsCopyright2007PearsonAddison-Wesley.Allrightsreserved.6-5Default Risk A bond with default risk will always have a positive risk premium, and an increase in its default risk will
5、raise the risk premium Because default risk is so important to the size of the risk premium , purchases of bonds need to know whether a corporation is likely to default on its bonds. This information is provided by credit-rating agencies, investment advisory firms that rate the quality of corporate
6、and municipal bonds in terms of the probability of default. Copyright2007PearsonAddison-Wesley.Allrightsreserved.6-7Bonds with ratings below Baa (or BBB) are consider as junk bonds美评级机构下调美国抵押贷款债券信用等级美评级机构下调美国抵押贷款债券信用等级发布时间：2007-07-11全球知名评级机构标准普尔公司和穆迪投资服务公司日下调美国抵押贷款债券的信用等级，市场担心这表明美国房地产和信贷市场状况将进一步恶化。当
7、天，标准普尔下调了美国种抵押贷款债券的信用等级，穆迪则下调了种抵押贷款债券的信用等级。两家信用评级机构的举动表明美国房地产市场陷入泥潭，短期内无法走出困境。债券信用级别降低，意味着持有抵押贷款债券的投资者将不可避免地遭受损失，并有可能引发抵押贷款利息上调。分析人士认为，目前困扰美国次级抵押贷款市场的信用问题无法改善，房地产市场将持续萎靡，并有可能影响美国的经济增长。（新华网）Liquidity A liquidity assetsis one that can be quickly and cheaply converted into cash if the need arises. The
8、more liquidity an assets is , the more desirable it is ( holding everything else constant )US Treasury Bonds are most liquid of all long term bondsCorporate Bonds are less liquid Income Tax ConsiderationThe Municipal Bonds have the lowest interest rate despite they have higher default risks and less
9、 liquid than those of US treasury bonds The interest payments on municipal bonds are exempt from federal income tax raise the after-tax expected return on these bonds demand rises demand curve of municipal bonds increases Copyright2007PearsonAddison-Wesley.Allrightsreserved.6-12Copyright2007PearsonA
10、ddison-Wesley.Allrightsreserved.6-13Term Structure of Interest RatesBonds with identical risk, liquidity, and tax characteristics may have different interest rates because the time remaining to maturity is differentYield curvea plot of the yield on bonds with differing terms to maturity but the same
11、 risk, liquidity and tax considerationsUpward-sloping long-term rates are above short-term ratesFlat short- and long-term rates are the sameInverted long-term rates are below short-term ratesYield Curve:A plot of the yields on bonds with differing time remaining to maturity but the same risk , liqui
12、dity and tax considerationSomeEmpiricalFactsInterest rates on bonds of different maturities move together over time When short-term interest rates are low, yield curves are more likely to have a upward slope; When short-term rates are high, yield curves are more likely to slope downward and be inver
13、ted Yield curves almost always slope upward How to explain these facts ? Copyright2007PearsonAddison-Wesley.Allrightsreserved.6-16Copyright2007PearsonAddison-Wesley.Allrightsreserved.6-17Expectations TheoryThe interest rate on a long-term bond will equal an average of the short-term interest rates t
14、hat people expect to occur over the life of the long-term bondEg. If people expect that short-term interest rates will be 10% on average over the coming five years, the theory predicts that the interest rate on bonds with five years to maturity will be 10% Assumption: Buyers of bonds do not prefer b
15、onds of one maturity over another; they will not hold any quantity of a bond if its expected return is less than that of another bond with a different maturityBonds like these are said to be perfect substitutesExpectationsTheoryInGeneralConsider two strategies : Purchase a one-year bond , and when i
16、t matures in one year, purchase another one year-bond Purchase a two-year bond and hold it until maturity Copyright2007PearsonAddison-Wesley.Allrightsreserved.6-19Expectations TheoryIn General (contd)Copyright2007PearsonAddison-Wesley.Allrightsreserved.6-20Expectations TheoryIn General (contd)Copyri
17、ght2007PearsonAddison-Wesley.Allrightsreserved.6-21Expectations TheoryIn General (contd)Copyright2007PearsonAddison-Wesley.Allrightsreserved.6-22Expectations TheoryExerciseIf one year interest rate over the next five years is expected to be 3%,4%,5% ,6% and7% Under Expectation Theory , the interest
18、rate on a two-year bond, a three-year bond , a four-year bond and five-year bond must be? Two-year bond : (3%+4%)/2=3.5%Three-year bond : (3%+4%+5%)/3=4%Four-year bond :(3%+4%+5%+6%)/4=4.5%Five-year bond: (3%+ 4%+5%+6%+7%)/5=5% If interest rates are expected to rise in the future , then long-term in
19、terest rate is higher than short term oneCopyright2007PearsonAddison-Wesley.Allrightsreserved.6-23Expectations TheoryExplains why interest rates on bonds with different maturities move together over time (fact 1) A rise in short-term rates will raise peoples expectations of future short-term interes
20、t rates, thus raise long-term rates, causing short-term and long term rates to move together Explains why yield curves tend to slope up when short-term rates are low and slope down when short-term rates are high (fact 2)When short-term interest rates are low ,people generally expect them to rise to
21、some normal level in the future average of future expected short-term rates is high relative to current short-term rate long term interest rte will be higher then current short-term rateCannot explain why yield curves usually slope upward (fact 3) The typical upward slope of yield curves implies tha
22、t short term rates are usually expected to rise in the future. In practice, short term rates are just as likely to fall as they are to rise yield curve should be flat Copyright2007PearsonAddison-Wesley.Allrightsreserved.6-25Segmented Markets TheoryThe interest rate for each bond with a different mat
23、urity is determined by the demand for and supply of that bondAssumption: Bonds of different maturities are not substitutes at all, so the expected return from holding a bond of one maturity has no effect on the demand for a bond of another maturity. Investors have preferences for bonds of one maturi
24、ty over anotherIf investors have short desired holding periods and generally prefer bonds with shorter maturities that have less interest-rate risk, then this explains why yield curves usually slope upward (fact 3)Copyright2007PearsonAddison-Wesley.Allrightsreserved.6-26Liquidity Premium & Preferred
25、 Habitat TheoriesThe interest rate on a long-term bond will equal an average of short-term interest rates expected to occur over the life of the long-term bond + a liquidity premium that responds to supply and demand conditions for that bondAssumption Bonds of different maturities are substitutes bu
26、t not perfect substitutes. The expected return on one bond does influence the expected return on a bond of different maturity ,but it allows investors to prefer one bond maturity over another .Investors tend to prefer short-term bonds (less interest rate risk)Copyright2007PearsonAddison-Wesley.Allri
27、ghtsreserved.6-27Liquidity Premium TheoryCopyright2007PearsonAddison-Wesley.Allrightsreserved.6-28Preferred Habitat TheoryInvestors have a preference for bonds of one maturity over anotherThey will be willing to buy bonds of different maturities only if they earn a somewhat higher expected returnInv
28、estors are likely to prefer short-term bonds over longer-term bondsCopyright2007PearsonAddison-Wesley.Allrightsreserved.6-29Copyright2007PearsonAddison-Wesley.Allrightsreserved.6-30Liquidity Premium and Preferred Habitat Theories, Explanation of the FactsInterest rates on different maturity bonds mo
29、ve together over time A rise in short-term interest rates indicates that short-term interest rate will be higher in the future ,and the first term in Equation implies that long-term rates will rise along with them Liquidity Premium and Preferred Habitat Theories, Explanation of the FactsYield curves
30、 tend to have an especially steep slope upward when short-term rates are low and to be inverted when short-term rates are highBecause investors generally expect short-term interest rates to rise to some normal level when they are low , the average of future expected short-term rats will be high rela
31、tive to the current short-term rate. With the additional boost of a positive liquidity premium, long-term interest rates will be substantially higher than the current short ones, and the yield curve will have a steep upward slope Liquidity Premium and Preferred Habitat Theories, Explanation of the F
32、actsThe liquidity premium and preferred habitat theory explain fact 3, which states that yield curve typically slope upward , by recognizing that the liquidity premium rises with a bonds maturity because of investors preferences for short-term bonds . Even if short-term interest rates are expected t
33、o stay the same on average, the premium makes long-term rates be above short-term rates yield curve typically slop upward Liquidity Premium and Preferred Habitat Theories, Explanation of the FactsHow to explain the inverted yield curve if liquidity premium is positive? It must be that at times short
34、-term interest rates are expected to fall so much in the future and the average of the expected short-term rates is so below the current short-term rate. Even when the positive premium is added, the resulting long-term rate will be still lower than the current oneCopyright2007PearsonAddison-Wesley.A
35、llrightsreserved.6-34Yield curve as a forecasting tool The yield curve has relevance not only for assessing investment opportunities, but for policy-makers who are trying to predict conditions in the macroeconomyRecall that rising interest rates are associated with expansions, and falling rates with
36、 recessions.If the yield curve is negatively-sloped, indicating expectations of falling short-term rates, it may be a predictor of a recessionRecall that a rise in expected inflation causes interest rates to rise.A steep yield curve is a predictor of a rise in inflation, while a flat or down-sloping curve predicts a fall in inflation.Alternatively: steep curve indicates loose monetary policy, while a flat or down-sloping curve indicates tight policy.http:/
