ECON-3076EL Lecture Notes - Lecture 10: Liquidity Trap, Predictive Power, Dbrs
28 Feb 2017
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Bonds of the same maturity pay different interest rates because of differences in their risk. Ex: 6-month bank deposit, 6-month t-bill, 6-month cp. Bond rating agencies: standard and poor"s, moody"s and fitch, drbs (dominion bond rating service) Bond ratings and interest rates rates on aaa bonds < rates on bbb bonds rates on bbb bonds < rates on junk bonds (fallen angels) rates on 5-yr canada bonds < rates on 5-yr greek bonds. A flight to quality occurs when, during a financial crisis, lenders" perceive an increase in the default risk on risky bonds. So, they tend to shift their funds from high risk to low-risk (government) bonds. Bonds of same default risk pay different interest rates because of differences in their term to maturity. T-bill, 1-year bond, 5-year bond, 10-year bond; . The plot of the relationship between the term to maturity and the yield to maturity is called the term structure of interest rates or the yield curve.
