货币银行学题库Chapter4 (3)

Chapter 6 The Risk and Term Structure

of Interest Rates

1. Risk Structure of Interest Rates

• Default risk—occurs when the issuer of the bond is unable or unwilling to make interest payments or pay off the face value

(a)U.S. T-bonds were considered default free

(b)Risk premium—the spread between the interest rates on bonds with default risk and the interest rates on T-bonds

• Liquidity—the ease with which an asset can be converted into cash. (the figure is like risk premium) • Income tax considerations

2. Term Structure of Interest Rates

Yield curve—a plot of the yield on bonds with differing terms to maturity but the same risk, liquidity and tax considerations Three important facts

1. Interest rates on bonds of different maturities move together over time

2. When short-term interest rates are low, yield curves are more likely to have an upward slope; when short-term rates are high, yield curves are more likely to slope downward and be inverted

3. Yield curves almost always slope upward Expectations Theory Key Assumption:

Bonds of different maturities are perfect substitutes • The interest rate on a long-term bond will equal an average of the short-term interest rates that people expect to occur over the life of the long-term bond • Buyers of bonds do not prefer bonds of one maturity over another; they will not hold any quantity of a bond if its expected return is less than that of another bond with a different maturity

Segmented Markets Theory

• Bonds of different maturities are not substitutes at all • The interest rate for each bond with a different maturity is determined by the demand for and supply of that bond

• Investors have preferences for bonds of one maturity over another

• If investors have short desired holding periods and generally prefer bonds with shorter maturities that have less interest-rate risk, then this explains why yield curves usually slope upward

Liquidity Premium & Preferred Habitat Theories

The interest rate on a long-term bond will equal an average of short-term interest rates expected to occur over the life of the long-term bond plus a liquidity premium that responds to supply and demand conditions for that bond

Key Assumption: Bonds of different maturities are substitutes, but are not perfect substitutes

Implication: Modifies Expectations Theory with features of Segmented Markets Theory

Investors prefer short rather than long bonds Þ must be paid positive liquidity (term) premium, lnt, to hold long-term bonds

Liquidity Premium and Preferred Habitat Theories, Explanation of the Facts

• Interest rates on different maturity bonds move together over time; explained by the first term in the equation

• Yield curves tend to slope upward when short-term rates are low and to be inverted when short-term rates are high; explained by the liquidity premium term in the first case and by a low expected average in the second case • Yield curves typically slope upward; explained by a larger liquidity premium as the term to maturity lengthens