Week- 5 Interest Rates and Stock MarketMoney and Banking Econ .docxalanfhall8953
Week- 5 Interest Rates and Stock Market
Money and Banking Econ 311
Thursday 7 - 9:45
Instructor: Thomas L. Thomas
Response over Time to an Increase in Money Supply Growth
2
Risk Structure of Interest Rates
Bonds with the same maturity have different interest rates due to:
Default risk
Liquidity
Tax considerations
Long-Term Bond Yields, 1919–2011
Sources: Board of Governors of the Federal Reserve System, Banking and Monetary Statistics, 1941–1970; Federal Reserve; www.federalreserve.gov/releases/h15/data.htm.
4
Risk Structure of Interest Rates (cont’d)
Default risk: probability that the issuer of the bond is unable or unwilling to make interest payments or pay off the face value
U.S. Treasury bonds are considered default free (government can raise taxes).
Risk premium: the spread between the interest rates on bonds with default risk and the interest rates on (same maturity) Treasury bonds
5
Bond Ratings by Moody’s, Standard and Poor’s, and Fitch
6
Risk Structure of Interest Rates (cont’d)
Liquidity: the relative ease with which an asset can be converted into cash
Cost of selling a bond
Number of buyers/sellers in a bond market
Income tax considerations
Interest payments on municipal bonds are exempt from federal income taxes.
Term Structure of Interest Rates
Bonds with identical risk, liquidity, and tax characteristics may have different interest rates because the time remaining to maturity is different
Yield curve: a plot of the yield on bonds with differing terms to maturity but the same risk, liquidity and tax considerations
Upward-sloping: long-term rates are above
short-term rates
Flat: short- and long-term rates are the same
Inverted: long-term rates are below short-term rates
Facts that the Theory of the Term Structure of Interest Rates Must Explain
Interest rates on bonds of different maturities move together over time
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
Yield curves almost always slope upward
9
Three Theories to Explain the Three Facts
Expectations theory explains the first two facts but not the third
Segmented markets theory explains fact three but not the first two
Liquidity premium theory combines the two theories to explain all three facts
10
Expectations Theory
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
Bond holders consider bonds with different maturities to be perfect substitutes
11
Expectations Theory: Example
Let the c.
Week- 5 Interest Rates and Stock MarketMoney and Banking Econ .docxalanfhall8953
Week- 5 Interest Rates and Stock Market
Money and Banking Econ 311
Thursday 7 - 9:45
Instructor: Thomas L. Thomas
Response over Time to an Increase in Money Supply Growth
2
Risk Structure of Interest Rates
Bonds with the same maturity have different interest rates due to:
Default risk
Liquidity
Tax considerations
Long-Term Bond Yields, 1919–2011
Sources: Board of Governors of the Federal Reserve System, Banking and Monetary Statistics, 1941–1970; Federal Reserve; www.federalreserve.gov/releases/h15/data.htm.
4
Risk Structure of Interest Rates (cont’d)
Default risk: probability that the issuer of the bond is unable or unwilling to make interest payments or pay off the face value
U.S. Treasury bonds are considered default free (government can raise taxes).
Risk premium: the spread between the interest rates on bonds with default risk and the interest rates on (same maturity) Treasury bonds
5
Bond Ratings by Moody’s, Standard and Poor’s, and Fitch
6
Risk Structure of Interest Rates (cont’d)
Liquidity: the relative ease with which an asset can be converted into cash
Cost of selling a bond
Number of buyers/sellers in a bond market
Income tax considerations
Interest payments on municipal bonds are exempt from federal income taxes.
Term Structure of Interest Rates
Bonds with identical risk, liquidity, and tax characteristics may have different interest rates because the time remaining to maturity is different
Yield curve: a plot of the yield on bonds with differing terms to maturity but the same risk, liquidity and tax considerations
Upward-sloping: long-term rates are above
short-term rates
Flat: short- and long-term rates are the same
Inverted: long-term rates are below short-term rates
Facts that the Theory of the Term Structure of Interest Rates Must Explain
Interest rates on bonds of different maturities move together over time
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
Yield curves almost always slope upward
9
Three Theories to Explain the Three Facts
Expectations theory explains the first two facts but not the third
Segmented markets theory explains fact three but not the first two
Liquidity premium theory combines the two theories to explain all three facts
10
Expectations Theory
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
Bond holders consider bonds with different maturities to be perfect substitutes
11
Expectations Theory: Example
Let the c.
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Describe interest rate fundamentals, the term structure of interest rates, and risk premiums. Discuss the general features,
yields, prices, ratings, popular types, and international issues of
corporate bonds. Review the legal aspects of bond financing and bond cost.
Income Matching Using Bonds NorCal 2011Brent Burns
Presentation slides from FPA NorCal 2011. Steve Huxley and I presented on how to create pension-like income usning individual bonds. Also contrasted against annuities, dividends and REITs.
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https://rb.gy/n89u77
Describe interest rate fundamentals, the term structure of interest rates, and risk premiums. Discuss the general features,
yields, prices, ratings, popular types, and international issues of
corporate bonds. Review the legal aspects of bond financing and bond cost.
Income Matching Using Bonds NorCal 2011Brent Burns
Presentation slides from FPA NorCal 2011. Steve Huxley and I presented on how to create pension-like income usning individual bonds. Also contrasted against annuities, dividends and REITs.
Attending a job Interview for B1 and B2 Englsih learnersErika906060
It is a sample of an interview for a business english class for pre-intermediate and intermediate english students with emphasis on the speking ability.
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2. Cost of Money
• Money can be obtained from debts or equity
both of which has a cost
– Cost of debt = interest
– Cost of equity = dividends
• What is cost for the borrowers of funds is
the return for lenders or investors.
– Return for bond or debt investors = interest,
capital gains
– Return for equity investors = dividends, capital
gains.
3. Fundamental factors affecting
“Cost of Money”
• Production Opportunities: The investment opportunities in
productive (cash-generating) assets.
• Time preference for consumption: The preference of
consumers for current consumption as opposed to saving for
future consumption.
• Risk: In a financial market context, the chance that an
investment will provide a low or negative return (i.e.
uncertainty of the future).
• Inflation: The amount by which prices increase over time
mostly due to the devaluation of currency.
23. Macroeconomic Factors that
influence Interest Rate levels
• Monetary Policy
• Federal Budget deficit or surplus
• International Factors
• Level of business activity
24. Monetary Policy
• Central banks like Bangladesh Bank and
Federal Reserves control money supply in the
economy.
• Too much supply will reduce the short-term
interest rates and increase the long-term
rates.
• Too little supply will have the opposite effect
25. Fiscal Policy
• Government makes federal budgets annually,
which is the basis of the country’s fiscal
policy.
• A deficit in the budget means government
have to borrow funds to cover it up and this
increases the demand for funds and thus the
interest rates.
• Sometimes government forces the central
bank to print in more money thus increasing
the supply and reducing the short-term rates.
26. International Factors
• Foreign Trade Deficit is a situation that exists
when a country imports more than it exports.
– Whenever there is deficit, it means borrowing
becomes necessary and this effects the interest
rates.
• Interest rates in other countries affect
the borrowings of local companies,
involved in foreign trade, and thus it
affects the local interest rates.
27. Business Activity
• Business activities include investments in new
ventures or expansion
• When there is a collective increase in business
activities in a country, then demand for funds
increases which also increase the short-term interest
rates.