Effects of Interest Rates on Price of Securities
Ch.5
Yield (total return) = Dollar inc + (end-beg) beg. Value
Risk of Return = r= Risk Free rate + Risk Prem r=rRF+DRP+LP+MRP
Risk Free Rate = rRF = r* + IP
-effects of int rates on PV/Price of securities: int goes up, value of bonds goes down, stock goes down (NPV) Prices
-factors that influence int rates/yield curve
1.production opportunities-return avail w/in an economy from inves. In productive asset; higher prod opp, higher return
2. Time preferences for consumption
3. Risk-change that fin asset won’t earn return promised
4. Inflation-price goes up over time
5. Federal reserve (monetary policy)-slow(control)growth and int rates go up; loosens money supply, int goes down (easy fed policy)
6. Deficit (fiscal policy)s- gov’t borrows, int goes up; larger the deficit, the higher the int
7. Int’l business-trade deficit goes up, int rates go up
8. Business activity-goes up, int goes up
-nom risk free rate-rate of int on sec that is free of all risk (Tbil)
-real risk free ratio-int rate that would exist on risk free sec if inflation is expected to be 0 during invest. Pd
-inflation prem-prem for expected inflation that investors add to real-risk free rate of return
-default risk prem-diff btwn 1 int rate on a US T-bond & corp bond of = maturity&marketability; wont meet obligations
-maturity prem-longer maturity, higher risk
-term structure of int rates-relationship btwn LT&ST rates
-yield curve-relationship btwn LT/ST rates
-normal yield curve=LT higher than ST rates; upward
-expectations theory-shape of yield curve depends on expectations concerning future inflation rates
-mkt segm theory-every borrower&lender has a preferred maturity&slope of yield curve depends on supply of dem for funds in LT mkt relative to ST mkt
-open mkt ops-fed reserve buys/sells treasury sec to expand/contract US money supply
Ch. 6 Bond Valuation
-bond-LT contract under which borrower agrees to make payments of int and principal on
Yield (total return) = Dollar inc + (end-beg) beg. Value
Risk of Return = r= Risk Free rate + Risk Prem r=rRF+DRP+LP+MRP
Risk Free Rate = rRF = r* + IP
-effects of int rates on PV/Price of securities: int goes up, value of bonds goes down, stock goes down (NPV) Prices
-factors that influence int rates/yield curve
1.production opportunities-return avail w/in an economy from inves. In productive asset; higher prod opp, higher return
2. Time preferences for consumption
3. Risk-change that fin asset won’t earn return promised
4. Inflation-price goes up over time
5. Federal reserve (monetary policy)-slow(control)growth and int rates go up; loosens money supply, int goes down (easy fed policy)
6. Deficit (fiscal policy)s- gov’t borrows, int goes up; larger the deficit, the higher the int
7. Int’l business-trade deficit goes up, int rates go up
8. Business activity-goes up, int goes up
-nom risk free rate-rate of int on sec that is free of all risk (Tbil)
-real risk free ratio-int rate that would exist on risk free sec if inflation is expected to be 0 during invest. Pd
-inflation prem-prem for expected inflation that investors add to real-risk free rate of return
-default risk prem-diff btwn 1 int rate on a US T-bond & corp bond of = maturity&marketability; wont meet obligations
-maturity prem-longer maturity, higher risk
-term structure of int rates-relationship btwn LT&ST rates
-yield curve-relationship btwn LT/ST rates
-normal yield curve=LT higher than ST rates; upward
-expectations theory-shape of yield curve depends on expectations concerning future inflation rates
-mkt segm theory-every borrower&lender has a preferred maturity&slope of yield curve depends on supply of dem for funds in LT mkt relative to ST mkt
-open mkt ops-fed reserve buys/sells treasury sec to expand/contract US money supply
Ch. 6 Bond Valuation
-bond-LT contract under which borrower agrees to make payments of int and principal on