ECN 506 Lecture Notes - Lecture 5: Substitute Good, High-Yield Debt, Interest Rate Risk

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28 Mar 2018

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Chapter 6- the risk and term structure of interest rates. Interest rates: examine the relationships of the various interest rate to one another, why interest rates differ from bond to bond, list and explain the three theories of why interest rates vary across different. Identify and explain the three factors affecting the risk structure of interest rates maturities. Interest rates on different categories of bonds differ from one another in any given year: the interest rates on corporate bonds, for example, were higher than those on. Risk structure of interest rates: bond yields differ across bonds of similar maturity, key factors that affect the risk structure of interest rates: Liquidity the ease with which an asset can be converted into cash. Invest-grade securities whose rating has fallen to junk level are referred to as fallen angels. Upward-sloping: long-term rates are above short-term rates. Flat: short- and long-term rates are the same. Inverted: long-term rates are below short-term rates.

Related Questions

11.1 The four fundamental factors that affect the supply and demand for investment capital that affect interest rates are investment opportunities, time preferences for consumption, risk, and inflation. Explain how each of these factors affects the cost of money.

11.2 The interest rate required by investors on a debt security can be expressed by the following equation:

Interest rate = RRF + IP + DRP + LP + MRP + CRP. Define each term of the equation, and explain how it affects the interest rate.

11.3 Briefly describe the following types of debt: a. Term loan b. Bond c. Mortgage bond d. Senior debt; junior debt, e. Debenture f. Municipal bond

11.4 Indenture Restrictive covenant Trustee Call provision (1) (2) (3) (4). What are the three primary bond rating agencies? What do bond ratings measure? How do investors interpret bond ratings? What is the difference between an A-rated bond and a B-rated bond? Why are bond ratings important to investors? Why are ratings important to businesses that issue bonds?

11.5 What is interest rate risk? What is price risk? What is a reinvestment rate risk?

11.6 Is this statement true or false? The values of outstanding bonds change whenever the going rate of interest changes. In general, short-term interest rates are more volatile than long-term rates, so short-term bond prices are more sensitive to interest rate changes than are long-term bond prices. Explain your answer.

viridiansardine578

Examine the note and bond yields presented below for Treasury and Corporate AAA, AA and A-rate bonds. Why do the yields differ across the securities and within securities, across time? Which premiums or market expectations most appropriately explain those differences? In particular, what accounts for the differences in rates across securities types for the same maturities? And speculate on what factor or factors can best explain why the yields rise as maturities lengthen (within particular types of bonds). Finally, do any securities look out of place and, if so, which and why?

Treasuries

2 year 0.33%

5 year 1.39%

10 year 2.64%

20 year 3.42%

Corporate, AAA

2 year 0.40%

5 year 1.77%

10 year 3.52%

20 year 4.93%

(table continues on next page)

Corporate, AA

2 year 0.63%

5 year 1.91%

10 year 3.50%

20 year 4.43%

Corporate, A

2 year 0.84%

5 year 2.15%

10 year 3.67%

20 year 4.75%

ECN 506 Lecture Notes - Lecture 5: Substitute Good, High-Yield Debt, Interest Rate Risk

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