金融市场与金融机构chapter4

制作人：王曼舒1Chapter

4Why

Do

Interest

Rates

Change?Chapter

Preview制作人：王曼舒2

Interest

rates

might

fluctuate

time

antime

and

affect

business

activities.will

examine

the

forces

that

moveinterest

rates

and

the

theories

behindthose

movements.

Topics

include:Determining

Asset

DemandSupply

and

Demand

in

the

Bond

MarketChanges

in

Equilibrium

Interest

Rates4.1

Determinants

of

Asset

Demand

An

asset

is

a

piece

of

property

that

isa

store

of

value.Facing

the

question

of

whether

to

buyand

hold

an

asset

or

whether

to

buyone

asset

rather

than

another,

anindividual

must

consider

the

followingfactors:Wealth,

expected

return,

risk

andliquidity制作人：王曼舒34.1.1

Wealth(财富)

Wealth,

the

total

resources

ownedby

the

individual,

including

allassets;

The

effect

of

changes

in

wealth:Other

things

being

equal,

anincrease

in

wealth

raises

thequantity

demanded

of

an

asset.制作人：王曼舒44.1.2

Expected

Return

(预期收益)

Expected

return:

the

return

expected

over

thenext

period,

on

one

asset

relative

to

alternatiassets;The

expected

return

on

an

asset

is

theweighted

average

of

all

possible

returns,

wherthe

weights

are

the

probabilities

of

occurrenc(发生事件)of

that

return:制作人：王曼舒5Re=

p1R1

+

p2R2,Wherep1

=

probability

of

occurrence

of

return

1;

R1

=

return

in

state

1p2

=

probability

of

occurrence

return

2;

R2

=

return

in

state

24.1.2.1

EXAMPLE

1:

Expected

Return(P62)What

is

the

expected

return

on

the

Mobil

Oil

bond

if

the

returnis

12%

two-thirds

of

the

time

and

8%

one-third

of

the

time?SolutionThe

expected

return

is

10.68%.制作人：王曼舒6Re=

p1R1

+

p2R2，

wherep1R1=

probability

of

occurrence

of

return

1=

return

in

state

1

=

12%

==

2/30.12=.67p2=

probability

of

occurrence

return

2

=1/3=.33R2=

return

in

state

2

=

8%

=0.08ThusRe=

(.67)(0.12)

+

(.33)(0.08)

=0.1068

=

10.68%4.1.3

Risk

Risk:

the

degree

of

uncertaintyassociated

with

the

return

on

one

assetrelative

to

alternative

assets;In

finance,

we

use

standard

deviation

oreturn

as

a

measure

of

risk;

The

formula

for

the

standard

deviationis

shown

as

on

P63制作人：王曼舒84.1.3.1

EXAMPLE

2:

Standard

Deviation

(a)

What

is

the

standard

deviation

of

the

returon

the

Fly-by-Night

Airlines

stock

and

Feeton-the

Ground

Bus

Company,

with

the

samereturn

outcomes

and

probabilities

describeas

on

P63?Of

these

two

stocks,

which

is

riskier?制作人：王曼舒94.1.3.2

EXAMPLE

2:

Standard

Deviation

(b)Solution

Fly-by-Night

Airlines

has

a

standard

deviation

ofreturns

of

5%.制作人：王曼舒104.1.3.3

EXAMPLE

2:

Standard

Deviation

(c)

Feet-on-the-Ground

Bus

Company

has

a

standarddeviation

of

returns

of

0%.制作人：王曼舒114.1.3.4

EXAMPLE

2:

Standard

Deviation

(d)

Fly-by-Night

Airlines

has

a

standard

deviatof

returns

of

5%;

Feet-on-the-Ground

BusCompany

has

a

standard

deviation

of

returnsof

0%

Clearly,

Fly-by-Night

Airlines

is

a

riskierbecause

its

standard

deviation

of

returns

ofis

higher

than

the

zero

standard

deviation

oreturns

for

Feet-on-the-Ground

Bus

Company,which

has

a

certain

return.制作人：王曼舒124.1.3.6

Effect

of

changes

in

risk制作人：王曼舒14Holding

everything

else

constanif

an

asset’s

risk

rises

relativthat

of

alternative

assets,

itsquantity

demanded

will

fall.4.1.4

Liquidity

Liquidity:

the

ease

and

speed

with

whichan

asset

can

be

turned

into

cash,

relativto

alternative

assets;

Effect

of

changes

in

liquidity:

The

moreliquid

an

asset

is

relative

to

alternativassets,

holding

everything

else

unchangethe

more

desirable

it

is,

and

the

greaterwill

be

the

quantity

demanded.Government

bond

VS

company

bond制作人：王曼舒154.1.5

Determinants

of

Asset

Demand制作人：王曼舒164.2

Supply

and

demand

in

the

bondmarket

We

want

to

study

the

interest-ratedetermination

by

examining

the

supply

ofand

demand

for

bonds;

Since

interest

rates

on

different

marketstend

to

move

together,

we

first

of

all

studby

supposing

that

there

is

only

one

type

ofsecurities

and

a

single

interest

rate

in

thentire

economy.

In

next

chapter,

we

will

discuss

whyinterest

rates

on

different

securities

dif制作人：王曼舒17Point

A:Point

B:4.2.1

Demand

Curve

(look

atFigure

1

on

P66)For

one-year

discount

bonds

(no

coupon,

face

valu$1000):制作人：王曼舒184.2.1.1

Demand

CurvePoint

C:

P

=

$850

i

=

17.6%Point

D:P

=

$800

i

=

25.0%Point

E:

P

=

$750

i

=

33.0%制作人：王曼舒19Bd

=

300Bd

=

400Bd

=

500

Demand

Curve

is

Bd

in

Figure

1

whichconnects

points

A,

B,

C,

D,

E.Has

usual

downward

slopeFigure

4.1

Supply

and

Demand

for

Bonds4.2.1.2

Supply

and

Demand

Analysisof

the

Bond

Market制作人：王曼舒204.2.2

Supply

Curvei

=

33.0%i

=

25.0%i

=

17.6%i

=

11.1%制作人：王曼舒21Point

F:

P

=

$750Point

G:

P

=

$800Point

C:

P

=

$850Point

H:

P

=

$900Point

I:

P

=

$950

i

=5.3%Bs

=

100Bs

=

200Bs

=

300Bs

=

400Bs

=

500

Supply

Curve

is

Bs

that

connects

points

F,

G,

C,

H,I,

and

has

upward

slope:

the

higher

the

interestrate,

the

less

willingness

to

issue

new

bonds.4.2.3

Market

Equilibrium1.

Occurs

when

Bd

=

Bs,

at

P*

=

850,

i*

=17.6%制作人：王曼舒222.

When

P

=

$950,

i

=

5.3%,

Bs

>

Bd(excess

supply):

P

to

P*,

ito

i*3.

When

P

=

$750,

i

=

33.0,

Bd

>

Bs(excess

demand):

P

to

P*,

i

to

i*4.2.3

Market

EquilibriumMarket

equilibrium

occurs

when

the

amount

thatpeople

are

willing

to

buy

(demand)

equals

the

amountthat

people

are

willing

to

sell

(supply)

at

a

given

prExcess

supply

occurs

when

the

amount

that

people制作人：王曼舒23are

willing

to

sell

(supply)

is

greater

than

the

amounpeople

are

willing

to

buy

(demand)

at

a

given

priceExcess

demand

occurs

when

the

amount

that

peopleare

willing

to

buy

(demand)

is

greater

than

theamount

that

people

are

willing

to

sell

(supply)

at

agiven

price.4.2.4

Supply

and

Demand

Analysis制作人：王曼舒24

Interest

rate

and

price

of

a

bond

arealways

negatively.4.2.5

Loanable(可贷出的)FundsFrameworkesvalue

in

the

usualdirection.1.

Demand

forbonds

=

supply

ofloanable

fundsn

Supply

ofbonds

=

demand

forloanable

fundsn

Therefore

we

can

usethe

Figure

4.2

toexpress

interest

ratFigure

4.2

A

Comparison

of

Terminology:

Loanable制作人：王曼舒25Funds

and

Supply

and

Demand

for

Bonds4.3

Changes

in

EquilibriumInterest

Rates制作人：王曼舒26

It

is

important

to

distinct

betweenmovements

along

a

demand

(orsupply)

curve

and

a

shifts

in

ademand

(or

supply)

curve.

When

quantity

demanded

changes

as

aresult

of

a

change

in

the

price

of

thebond,

we

have

a

movement

along

thedemand

curve,

e.g.,

from

Point

A

to

B;制作人：王曼舒274.3.1

Shift

in

the

demand

for

Bonds制作人：王曼舒28

When

quantity

demanded

changes

ateach

given

price

of

the

bond

inresponse

to

a

change

in

some

otherfactor

besides

the

bond’s

price

orinterest

rate,

we

have

a

shift

in

thedemand

curve,

e.g.

B1d

to

B2d

.4.3.1

Shifts

in

the

Demand

Curve制作人：王曼舒29Figure

4.3

Shifts

in

the

Demand

Curve

for

Bonds4.3.1.1

How

Factors

Shift

theDemand

Curve

-

Wealth制作人：王曼舒30Wealth

Economy ,

wealth ,

Bd

,

Bd

shifts

outo

right,

and

the

vice

versa.4.3.1.2

How

Factors

Shift

theDemand

Curve

–

Expected

return制作人：王曼舒31Expected

Return

i

in

future,

Re

for

long-term

bondsshifts

out

to

right■πe,

relative

Re

,

Bd

shifts

out

to

ri4.3.1.3

How

Factors

Shift

theDemand

Curve

-

Risk制作人：王曼舒32Risk

Risk

of

bondsright,

Bd

,

Bd

shifts

out

to,

Bd

,

Bd

shifts

Risk

of

other

assetsto

right4.3.1.4

How

Factors

Shift

theDemand

Curve

-

Liquidity制作人：王曼舒33Liquidity

Liquidity

of

bondsright,

Bd

,

Bd

shifts

ou,

Bd

,Bd

sh

Liquidity

of

other

assetsout

to

right4.3.1.6

Summary

of

Shiftsin

the

Demand

for

Bonds

(1)制作人：王曼舒35

Wealth:

in

a

business

cycle

expansion

withgrowing

wealth,

the

demand

for

bonds

rises,conversely,

in

a

recession,

when

income

andwealth

are

falling,

the

demand

for

bondsfalls

Expected

returns:

higher

expectedinterest

rates

in

the

future

decrease

thedemand

for

long-term

bonds,

conversely,lower

expected

interest

rates

in

the

futureincrease

the

demand

for

long-term

bonds4.3.1.6

Summary

of

Shiftsin

the

Demand

for

Bonds

(2)制作人：王曼舒36

Risk:

an

increase

in

the

riskiness

of

bondscauses

the

demand

for

bonds

to

fall,conversely,

an

increase

in

the

riskiness

ofalternative

assets

(like

stocks)

causes

thedemand

for

bondsto

rise

Liquidity:

increased

liquidity

of

the

bondmarket

results

in

an

increased

demand

forbonds,

conversely,

increased

liquidity

ofalternative

asset

markets

(like

the

stockmarket)

lowers

the

demand

for

bonds4.3.2

Shift

in

the

Supply

ofBonds制作人：王曼舒37Certain

factors

can

cause

the

supplycurve

for

bonds

to

shift:

Expected

profitability

of

investmentopportunities;Expected

inflation;Government

activities.4.3.2

Shift

in

the

Supply

of

Bond制作人：王曼舒38Figure

4.4

Shift

in

the

Supply

Curve

for

Bonds4.3.2.1

Factors

that

shift

supplycurve-

Profitability制作人：王曼舒39Profitability

of

Investment

Opportunities

Business

cycle

expansion,

investmentopportunities ,

Bs

,

Bs

shifts

out

torightIn

a

business

cycle

expansion,

the

supply

ofbonds

increases,

conversely,

in

a

recessionwhen

there

are

far

fewer

expectedprofitable

investment

opportunities,

thesupply

of

bonds

falls4.3.2.2

Factors

that

shift

supplcurve-

Expected

Inflation制作人：王曼舒40Expected

Inflation■πe,

Bs

,

Bs

shifts

outto

rightAn

increase

in

expected

inflation

causes

thesupply

of

bonds

to

increase4.3.2.3

Factors

that

shift

supplcurve-

Government

Activity制作人：王曼舒41Government

ActivitiesDeficits ,

Bs

,

Bs

shifts

out

toHigher

government

deficits

increase

thsupply

of

bonds,

conversely,government

surpluses

decrease

thesupply

of

bonds4.3.2.4

Factors

That

Shift

SupplCurve

(Table

3)制作人：王曼舒424.4

Fisher

Effect

and

Businesscycle制作人：王曼舒43Fisher

EffectBusiness

cycle4.4.1

Changes

in

expected

inflationeIf

πe1.

Relative

Re

,Bd

shifts

into

left制作人：王曼舒442.Bs,

Bs

shiftsout

to

right3.

P

,

iFigure

4.5

Response

to

a

Change

in

Expected

Inflation4.4.2

Fisher

Effect

Our

analysis

on

demand

and

supply

hasbrought

an

important

observation:

whenexpected

inflation

rises,

interest

ratewill

rise.

This

observation

was

firstly

pointed

outby

Irving

Fisher,

and

therefore

calledFisher

Effect.

Irving

Fisher,

famous

economist(

(1867-1947)制作人：王曼舒45Figure

4.6

Expected

Inflation

and

Interest

Rates

(Three-Month

Treasury

Bills),

1953–20044.4.3

Evidence

on

the

Fisher

Effectin

the

United

States制作人：王曼舒464.4.5

Business

Cycle

Expansion1.

Wealth ,

Bd

,Bd

shifts

out

torightn

Investment

,制作人：王曼舒48Bs,

Bs

shiftsright1.

If

Bs

shiftsmore

than

Bdthen

P

,iFigure

4.7

Response

to

a

BusinessCycle

Expansion4.4.6

Evidence

on

Business

Cyclesand

Interest

RatesFigure

4.8

Business

Cycle

and

Interest

Rates

(Three-Month

Treasury

Bills),

1951–2