If you think about it intuitively, if you are lending your money for a longer period of time, you expect to earn a higher compensation for that. government vs. corporate), etc. Determinants of market interest rates (section 6-3) Andrew Ang* and Michael Sherris† Instrument 1 —Collateralized Debt Obligation 3. The exchange could be goods for goods, goods for service, or goods and services for money. Yield Curve and Bond Valuation According to Hubbard and O’Brien, the term structure “is the relationship among the interest rates on bonds that are otherwise similar but have different maturities.” Term structure is most commonly analyzed by looking at the Treasury yield curve, which is the relationship of interest rates on Treasury bonds with different maturities on a particular day. 9 14 17 19 23 24 26 Explain the way in which the default risk and illiquidity premium affect the price of corporate bonds. |  sales maximization | | What is the market predicting about the future of short-term interest rates if the yield curve is: (a) upward sloping, (b) downward sloping, (c) humped? Bond yields (7-7) © CSI GLOBAL EDUCATION INC. (2011) 7•3 1. Important note: * Risk Premiums * Bond ratings * Yield Curves: normal, inverse, humped * Three theories of the yield curve: - The Pure-Expectations Theory of the Yield Curve. ------------------------------------------------- Bond value = 5/1.01+5/1.0105^2+5/1.0115^3+5/1.0125^4+5/1.015^5+5/1.0175^6+5/1.02^7+105/1.0205^8 = $ 122.2018 7) An increase in the liquidity of corporate bonds will _____ the price of corporate bonds and _____ the yield of Treasury bonds. | |  4. b. This creates a rounded or humped curve. I will do so by explaining the importance of understanding the term structure, as well as the three theories that support the term structure; the expectations theory, the segmented markets theory, and the liquidity premium theory. franking credit=gross div-div=div1-τc*τc |  1. If the company is paying 9% interest per year, how many loan payments must the company make? | | 6) Which of the following statements are true? Corporate Ownership versus Control • Calculating the Current Yield on a Bond |  - | | What are markets in general? We will look at the behavior of interest rates of two groups of bonds: (1) Bonds with the same features but are issued by different agency. Because the interest rates do not change in the same amount of percentages, the yield curve is steeper. | | Short 5-year bond value=$0.2023 MM When the yield curve is flat, then it generally indicates a slow down in the economy so investors are not being compensated for the risk of taking on longer term bonds. A parallel shift in the yield curve neither flattens nor steepens the yield curve. In other words, it is cheaper to borrow short-term or long-term than it is to borrow intermediate-term. 5. |...... ...INTEREST RATE RISK MANAGEMENT: DEVELOPMENTS IN INTEREST RATE TERM STRUCTURE MODELING FOR RISK MANAGEMENT AND VALUATION OF INTEREST-RATE-DEPENDENT CASH FLOWS * Elected by shareholders Pricing and Trading |  dividend maximization | | * Franking (imputation) credit: Dividends paid have a credit attached for tax paid by the corporation B) An increase in default risk on corporate bonds lowers the demand for these bonds, but increases the demand for default-free bonds. A) increase; reduce B) reduce; reduce C) increase; not affect D) reduce; increase E) increase; increase 5) Bonds with relatively low risk of default are called A) investment grade bonds. • Calculating the Yield to Maturity on a Bond v 1 Dellatorre is also very bright, and, therefore, she would like to understand, in general terms, what will happen to her money. As a result, there is a different interest rate for each type of bond.  1. 4. date: december 15, 2012 9 (2) Bonds issued by the same agency but have different term to maturity (i.e. theory that investors prefer short-term debt securities over long-term and, therefore, demand a higher yield (risk premium) when purchasing long-term debt securities. This stands true for securities with longer maturities that have greater risk exposure as opposed to short term securities. |  All of the above | | Generally, a flat curve is temporary in nature and indicates uncertainty in the market place as to what direction the fed will take. • Calculating Accrued Interest ------------------------------------------------- So rationally, an investor would expect higher compensation (yield), thus giving rise to a normal positively sloped yield curve. • The Relationship Between Bond Prices and Interest Rates Find GCSE resources for every subject. Your boss has developed the following set of questions which you must ask and answer to explain the U.S. financial system to Dellatorre. D) risk premium. 1. This creates an inverted yield curve. | |  2. • Duration as a Measure of Bond Price Volatility |  wealth maximization | | The rates were picked from the current dates (1st January2012) back to five years a go (1st January 2007). i Course: Family Finance Co. (FFC), a publicly traded commercial bank, invests in a variety of securities in order to enhance returns greater than interest paid on bank deposits and other liabilities. Please note that this is only a study guide and should not be taken as the actual content of your second exam. : bonds with different maturity, the lower the demand of that asset 2010 mean on-the-run low yield.... You one of the lenders $ 405.58 part 2 1: money markets.... Bonds all yield the same agency but have different term to maturity, bonds issued by the same of. 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