Structure of Interest Rates.ppt

1、3,Structure of Interest Rates,Chapter Objectives,Learn why individual securitys yield differ or why security prices vary or change Analyze theories explaining why rates vary by term or maturity, called the term structure of interest rates,Yield,What is yield? The income return on an investment. This

2、 refers to theinterest or dividends received from a security and isusually expressed annually as a percentage based on the investments cost,its current market value orits face value. For example, there are two stock dividend yields.If you buy a stock for $30 (cost basis) and its current price and an

3、nual dividend is $33 and$1, respectively,the cost yieldwill be 3.3% ($1/$30) andthe current yieldwill be 3% ($1/$33).,Yield,Types of yield Bonds have fouryields: coupon (the bond interest rate fixedat issuance), current (the bond interest rate as a percentage of the current price of the bond), and y

4、ield to maturity (an estimate of what an investor will receive if the bond is held to its maturity date). Non-taxablemunicipal bonds will have a tax-equivalent (TE) yield determined by the investors tax bracket.,Yield,Types of yield Mutual fund yields are an annual percentagemeasure of income (divid

5、ends and interest) earned by the funds portfolio, net of the funds expenses. In addition, the SEC yield is an indicator of the percentageyield on a fund based on a 30-day period.,Yield to Maturity,What is yield to maturity The rate of return anticipated on a bond if it is held until the maturity dat

6、e. YTM is considered a long-term bond yield expressed as an annual rate. The calculation of YTM takes into account the current market price, par value, coupon interest rate and time to maturity. It is also assumed that all coupons are reinvested at the same rate. Sometimes this is simply referred to

7、as “yield” for short.,收益率. 到期收益率,收益率 收益率是指投资的收益率，一般以年度百分比表达，根据当时市场价格、面值、息票利率以及距离到期日时间计算。对公司而言，收益率指净利润占使用的平均资本的百分比。 到期收益率 投资人按当前市价买进债券，如期收到全部利息和赎回本金，并一直持有至债券到期可获得的回报率即是到期收益率。将债券未来的现金流以到期收益率折现为现值，会等于债券的市价。到期收益率的计算内含一个假设，即到期前收到的全部利息均按到期收益率再投资。,Difference between interest rates and yield,Rate is the spe

8、cified interest rate paid on a financial instrument (such as a bond). The interest is calculated by applying the rate to the face value of the instrument. The yield is calculated by dividing the interest amount received by the price paid for the investment, and the time held. So, if you bought a bon

9、d at a discounted price (below the face value), your yield would be higher than the rate.,Difference between interest rates and yield,You buy a bond on Jan 1 with a face value of $1,000 and a stated rate of 5% (annual interest payment) at the discounted price of $950. On Dec 31, you receive $50 in i

10、nterest (1,000 x 5%) which gives you a 5.26% yield (50/950). Or, if you bought a bond for face value close to the coupon date, your yield would be higher than the rate. On July 1, you pay the face value of $1,000 for a bond with a stated rate of 5% and which matures on 12/31. You receive $1,050 , a

11、$50 yield for 6 mos., for a 10% annual yield.,1. Factors Affecting Security Yields,Risk-averse investors demand higher yields for added riskiness Risk is associated with variability of returns Increased riskiness generates lower security prices or higher investor required rates of return,Factors Aff

12、ecting Security Yields,Security yields and prices are affected by levels and changes in: Default risk (also called Credit Risk) Liquidity Tax status Term to maturity Special contract provisions such as embedded options,1.1 Factors Affecting Security Yields-Credit (default) Risk,Credit risk-which is

13、especially relevant for longer-term securities that expose creditors to the possibility of default for longer time Rating agencies: Moodys Investor Service; Standard and Poors Corporation; and Fitch Ratings The ratings are based on a financial assessment of the issuing corporation. The higher the ra

14、ting, the lower the perceived credit risk,1.1 Factors Affecting Security Yields-Credit (default) Risk,Benchmarkrisk-free treasury securities for given maturity Default risk premium = risky security yield treasury security yield of same maturity Default risk premium = market expected default loss rat

15、e Anticipated or actual ratings changes impact security prices and yields Risk perception, especially during market crash, also impact security prices and yields (Exhibit 3.2),1.2 Factors Affecting Security Yields-Liquidity,The Liquidity of a security affects the yield/price of the security A liquid

16、 investment is easily converted to cash at minimum transactions cost Investors pay more (lower yield) for liquid investment Liquidity is associated with short-term, low default risk, marketable securities,1.3 Factors Affecting Security Yields-Tax Status,Tax status of income or gain on security impac

17、ts the security yield Investor concerned with after-tax return or yield Investors require higher yields For higher taxed securities,Factors Affecting Security Yields,Yat = Ybt(1 T) Where: Yat = after-tax yield Ybt = before-tax yield T = investors marginal tax rate,Factors Affecting Security Yields,E

18、xample: a taxable security that offers a before-tax yield of 14 percent. The investors tax rate is 20 percent. Calculate the after-tax yield. Yat = 14%(1 0.2) = 11.2% The fully taxable pre-tax equivalent corporate bond for a 11.2% municipal bond is: Ybt = 11.2%/(1 .2) = 14%,1.4 Factors Affecting Security Yields-Term to Maturity,Term to maturity Interest rates typically vary by maturity. The term structure of interest rates defines the relationship between maturity and yield. The Yield Curve is the plot of current interest yields versus time to maturity.,Yield Curve,An upward-sloping