COMM 220 Study Guide - Final Guide: Substitute Good, Credit Risk, Yield Curve

• School: Concordia University
• Department: Commerce
• Course: COMM 220
• Professor: Sirage Alattas

Document Summary

Chapter 12 - the risk and term structure of interest rates. Liquidity: ease an asset can be converted into cash: cost of selling a bond, number of buyers/sellers in a bond market. Income tax considerations: interest payments on municipal bonds are exempt from federal income taxes: response to an increase in default risk on corporate bonds: 1st step: increase in default risk shift demand curve for corporate bonds to the left (decrease demand) 2nd step: it shift the demand curve for canada bonds to the right (increase demand) 3rd step: it raises price of canada bond and lower price of corporate bonds, lower interest rate on canada bonds and rises rate of corporate bonds increasing risk premium. Term structure of interest rates: yield curve: plot of yield on bonds with differing terms to maturity but same risk, liquidity & tax considerations, upward-sloping: long-term rates are above short-term rates. Flat: short- and long-term rates are the same.