资本市场和金融机构2-课件

1、资本市场和金融机构资本市场和金融机构1. Interest Rate (i)i = Cost of borrowing or lending moneyIt plays a pivotal role in:the Investment and Financing of assets (real, financial)by individuals, companies, governments and FIthe performance of the economyDetermined in the Debt Markets (supply and demand) and by governme

2、nt intervention.Central Bank Monetary policy (i, M)Is there an appropriate level of i?21. Interest Rate (i)i = Cost oInterest RateHow the interest rates are determined?What explains the fluctuation of interest rates?Most accurate measure of interest rate: Yield to maturityExample applied to bond val

3、uation3Interest RateHow the interest Determination of Interest Rate (i) Approaches1) Analysis of Demand of loanable funds and Supply of loanable funds2) Analysis of Demand for and supply of bondsSupply of loanable funds by households and firms. The higher the i the higher the quantity of loanable fu

4、nds offeredDemand of loanable funds by households and firmsReasons for Consumer?For Firms? Total Demand = Demand by households and firmsDeterminants of the Demand and Supply4Determination of Interest RateSupply and Demand for Loanable FundsInterest Rate (i)SupplyQuantity of loanable funds DemandQ*i*

5、5Supply and Demand for Loanable What determines the supply of loanable funds? The supply of loanable funds is determined by the interest rate offered to savers. A higher interest rate induces households to consume less today (save) in favor of greater consumption in the future. Firm also may have ex

6、cess of cash that may be loaned (e.g., purchase of other firms bond issue) instead of invested (real assets) because of the non availability of projects with +NPV. What determines the demand for loanable funds? It comes from: consumers who wish to consume more today than tomorrow, individuals, finan

7、cial and non-financial firms to invest in financial assets financial and non-financial firms to invest in real assets Demand depends on the interest rate at which these three groups can borrow. The lower the interest rate the higher the demand and vice-versa.6 What determines the supply of2. Fluctua

8、tion of interest rates What might cause the supply or demand for loanable funds to shift, and how would that affect interest rates? Factors that shift the demand curve. a) Recession: It decreases demand at all interest rates, shifting the demand curve inwards and causing the equilibrium interest rat

9、e to fall. Quantity ($)AB Interest Rate SDDiiQQ72. Fluctuation of interest ratb) An increase of the government deficit. C) Rise in expected inflation shifts the demand curve to the right. Same as (b)Nominal Interest rate = real interest rate + rate of expected inflation D) increase on the growth rat

10、e of population. Same as (b) e) Business cycle expansion. Expected increase in economic growthSame as (b)iQ ($)DD SAB8b) An increase of the governmExamples that shift the Supply curve to the right Increases in the money supply by the Central Bank, causing the interest rate to fall.b) Increases in re

11、al personal income make people more willing to make loans (e.g. deposits in banks accounts)c) Increase in tax exempt financial instruments. Note: if we assume that thecentral bank controls theamount of money supply at fixed quantity the Supply Curve for money S would be a vertical line.iQ ($)SSAB9Ex

12、amples that shift the Supply3. Variety of Interest RatesT-bill rate ( 1year)Discount rate: Central Bank charges to banks In Canada is called the Overnight Bank Rate Commercial paper rate: Short term discount bonds Prime rate: Short term Rate charged to largest firms (creditworthy)Corporate bond rate

13、: Long term rate for debt issued by firmsLIBOR: Rate that largest creditworthy international banks dealing in Eurodollars charge each other for large loans.Fixed rates, floating rates, etc.They differ because of the differences in maturity, risk of lenders 103. Variety of Interest RatesT- 4.Analysis

14、 of Bond ValuationIt sheds light on the concept of interest rate. Bond. Contract in which a borrower agrees to pay a bondholder (the lender) a specific amount of money in a period of time.Example: How much would you pay for a bond that promises a coupon rate of $100 each year for a period of 10 year

15、s and the principal amount of $1,000 (par value=nominal value = face value) at the end of the 10th year? Assume i= 5%, i=10%, i=15%11 4.Analysis of Bond ValuatiFormula P = Coupon/(1+i) + Coupon/(1+i)2 + Coupon/(1+i)10 + Face Value/(1+i)10 C=$100C=$100C=$100P=?123 9 10C=$100$100 + $1,000If i = 5% P =

16、 $100/(1+0.05) + $100/(1+0.05)2 + $100/(1+0.05)10 + $1,000/(1+0.05)10 = $1,386 i = 10% P = $100/(1+0.10) + $100/(1+0.10)2 + $100/(1+010)10 + $1,000/(1+0.010)10 = $1,000 i = 15% P = $100/(1+0.15) + $100/(1+0.15)2 + $100/(1+015)10 + $1,000/(1+0.015)10 = $749 Which i (discount rate or yield to maturity

17、) from above makes the present value of a bonds payments equal to its current price P?A:? i = 5%12Formula C=$100C=$100C=$100P=?1YTM = Interest rate that equates the Present Value of payments received from a debt instrument (e.g., bond) with its value today P.Alternatively, is the rate of interest ea

18、rned on a bond if it is held to maturity. The YTM is the most important and accurate way of calculating interest rates. If P = $1,386 What is the YTM = i? $1,386 = $100/(1+i) + $100/(1+i)2 + $100/(1+i)10 + $1,000/(1+i)10 = $1,000 A: YTM = i = 5% If P = $1,000 What is the YTM? YTM = 10% If P = $749 W

19、hat is the YTM? YTM = 15% What is the relationship between the Bond price and the i? Why? Price of bond Fig. Yield to maturity of a bond = effective yield on a bond = i$1,00010%Interest Rate = i = YTM5% $1,386$74915%Scenarios:Assume you bought the bond in $1,000 and interest rates increased to 15%.

20、Did you benefit? Assume you bought a corporate bond and the credit rating of the firm is downgraded to junk (default) What is the expected effect in the interest rate (YTM)?13YTM = Interest rate that equatPerpetuityBond paying out a fixed amount of money each year forever.Example The Canadian govern

21、ment issues a bond that will pay to perpetuity $50 a year. If the interest rate is 3% annual, a) what is the bond worth today? b) Would you buy the bond for $1,500? The present value of a perpetuity is easily obtained as PDV = perpetuity/RA: Effective Yield (YTM) on a Bond (perpetuity)Percentage ret

22、urn that one receives by investing in a bondAssume price of the perpetuity above is $1,666.67 and you receive a perpetual coupon rate of $50 per year. What is the effective yield rate or rate or return?A: Now, suppose the current interest rate is 4%. Would you pay $1,666.67 for the bond?14Perpetuity

23、165. Risk and Term Structure of Interest RatesVariety of different interest rate = f(maturity, risk, liquidity, taxes).I) Assuming various debt instruments (bonds) have same maturity, their is will differ because of differences in risk. Risk Structure of Interest Rates (RSIR).RSIR expresses the rela

24、tions of interest rates for various bond instruments whose determinants are (1) default risk, (2) liquidity, and (3) taxes (See Fig.1, p. 110, Miskhin et al. - Long Term Bonds)II) Assuming various bonds have same risk their is may differ because of the differences in maturities. Term Structure of In

25、terest Rates (TSIR).TSIR expresses the the relationship among is (YTMs) on zero coupon discount bonds with different maturities.155. Risk and Term Structure of 5.1 Determinants of RISK STRUCTURE OF INTEREST RATES (RSIR)Interest rates on corporate bonds are higher than those on Canada bonds (See Figu

26、re 1)Reasons1. Higher Default Risk 2. Lower Liquidity 3. Tax considerations on is payments. Canadian (Cdn) bonds are default-free bonds Difference in is = Risk Premium 1.Effect of Default risk on interest rates Assume initially a corporate bonds with no default risk, like Canada bonds (with same mat

27、urity). Possibility of a strong recession increases the possibility of default of corporate bonds. What will the effect be on interest rates of corporate bonds and Canada bonds? What will happen to the risk premium of corporate bonds? ii Price of bonds, PPQuantity of Corporate Bonds Quantity of Cana

28、da Bonds(a) Corporate bond market (b) Default-free Cdn bond marketic1Pc1Pc2ic2PT2PT1iT2iT1iT2 ic2RiskPremium= ic2 - iT2Dc2Dc1ScDT1DT2STDecrease inInterest rate165.1 Determinants of RISK STRUCInvestment advisory firms providers of default risk information on bonds: Standards and Poors Canada, Dominio

29、n Bond Rating Service.Investment grade-bonds (AAA) vs. Junk bonds (D) (See Fig. 3, p. 113, Mishkin et al.) Risk premium on BBB corporate bond rates (Corporates-Canada Spread, 1980-2019)17Investment advisory firms prov2. Effect of Liquidity on interest ratesLiquidity. Ability to buy or sell an asset

30、quickly and in large volume without substantially affecting the assets price.Corporate bonds vs. Canada bondsWhich ones are more liquid? Spread?Assume initially corporate bonds and Canada bonds are equally liquid, ceteris paribus. a) Which event (s) would decrease the liquidity of corporate bonds? W

31、hy?b) What will the effect be on interest rates of corporate bonds and Canada bonds? c) What will happen to the risk (liquidity) premium of corporate bonds? Draw their respective graphs (demand and supply curves of Corporates and Canada bonds).182. Effect of Liquidity on inte3. Tax ConsiderationsHow

32、 does taxation affect the interest rate (YTM) on bonds?Government bonds that pay no taxes yield lower interest rates (e.g., U.S. municipal bonds or munis). Munis are advantageous for high tax-bracket investors. Example: Suppose Charlie White (a US investor) has 2 alternatives to invest his savings (

33、say $1,000) invest a $1,000 face value muni that sells for $,1000, with coupon payments of $80. 2) invest a $1,000 face value taxable bond that sells for $1,000 and has a coupon payment of $120. The tax-bracket is 35%. a) Which option should he choose? Why? b) Suppose Jane Red is faced with similar

34、options but her tax-bracket is 30%. What option would be best for her? c) Does it matter to know the maturity of the bonds to obtain their YTM?193. Tax Considerations215.2 Term Structure of Interest Rates (TSIR)The TSIR refers to the relationship between YTM and term to maturity for bonds of same ri

35、sk class.The Yield Curve is the graphical representation of the TSIR.The Yield Curve shape can bea) Upward-sloping Long Term is Short Term isb) Flat Long term is = Short Term isc) Downward-sloping (inverted yield curve) LT is Short Term is average of future ST rates is expected current short term ra

36、tes Downward-sloping Long Term is Short Term is average of future ST rates is expected current short term rates Flat Long Term is = Short Term is average of future ST rates is expected = current short term rates 24A) Pure Expectations Theory26Expected holding-period yields (HPY) on bonds of all matu

37、rities (with same risk) ought to be about equal, that is:1. HPY(1-year bond) = HPY (2-year bond) = = HPY (n-year bond) 2. If we know the one-year HPY(commonly called yield) on two bonds of n-1, and n maturities, we can obtain the market expectation of the future short-term interest rate on year n (a

38、lso called forward rate).Implications of Expectations Theory25Expected holding-period yielExample - If one-year bonds offer an 8% annual yield (return) and the principal and interest are reinvested at 10% at the end of first year while - two-year bonds have an YTM (i, or annual yield, or commonly ca

39、lled yield*) of 8.995%, both bonds must have same holding period yield (HPY), that is:*In practice yield refers to one-year interest rate. 1. Two-year HPY for both types of bonds Two-year HPY of 1-year bonds = (1+0.08)(1+0.1)-1 = 0.188 or 18.8% Two-year HPY of 2-year bonds =(1.08995)(1.08995)-1 = 0.

40、188 or 18.8% 2. One-year HPY (commonly called yield) yield of 1-year bonds = (1+0.08)(1+0.1)1/2- 1 = (1.188)0.5 1 = 0.08995 or 8.995% yield of 2-year bonds = 8.995% (given)If it is not given you can obtain it from Two-year HPY of 1-year bonds Yield of 2-year bonds = (1+two-year HPY of 1-year bonds)1

41、/2 -1 = (1.188)1/2 1 = 0.08995 or 8.995%. 3. The expected year two interest rate, i2, (or forward rate) is obtained as follows (1+ yield of one year bonds)1 (1+i2) = (1+yield of two years bonds)2 (1+i2) = (1+ yield of two years bonds)2/(1+yield of one year bonds)1 = (1.08995)2/1.08-1 = 1.0999-1 = 9.

42、999 10% 26Example 28Generalizing 1. One-year HPY (or yield) for 1-year bonds reinvested T periods (at t+1 rate) Yield of 1-year bonds = (1+i1) (1+i2) + (1+iT )1/T-1 Based on previous example T=2 HPY (1-year bonds) =(1+0.08)(1.1)1/2 1 =0.08995 or 8.995 2. One-year HPY for n-year bonds (usually given)

43、 If it is not given, it can be obtained from the n-year HPY for 1-year bonds reinvested each year, as follows Yield of n-year bonds = (1+ n-year HPY of one-year bonds)1/n 1 Based on the example of previous slide Yield of 2-year bonds = (1+ two-year HPY of 1-year bonds)1/2 1 = (1.188)1/2 1 = 0.08995

44、or 8.995%.3. Expected year n interest rate, in, (or forward rate) It is obtained as follows: (1+ yield of n-1 year bonds)n-1 (1+in) = (1+ yield of n-year bonds)n (1+in) = (1+yield of n-year bonds)n / (1+ yield of n-1 year bonds)n-1 in = (1+yield of n-year bonds)n / (1+ yield of n-1 year bonds)n-1 1

45、Based on previous example the expected year 2 interest rate (or forward rate) is (1+i2) = (1+ yield of two years bonds)2/(1+yield of one year bonds)1 = i2 = (1.08995)2/1.08-1 = 1.0999-1 = 9.999 10% 27Generalizing29Solve the following problemsAssume the Expectations Theory holds 1. a) Determine the O

46、ne-year HPY (or yield, assumed annual) for 1-year bonds reinvested 3 periods such as the expected interest rates are 5, 6 and 7 percent, for years 1, 2 and 3, respectively. b) Determine the yield for 3-year bonds. 2. Determine the three-year HPY for 3-year bonds that have yields to maturity (or yiel

47、ds, assumed annual) of 5.9968% Assume that two-year maturity bonds offer yields (assumed annual) of 5.4988%, and three-year bonds have yields of 5.9968 %. Determine the expected one-year interest rate (forward rate) for the third year. What does this tell you about the monetary policy to purse by th

48、e Bank of Canada? 28Solve the following problems30B) Market Segmentation TheoryThis theory holds that long-and short-term maturity bonds are traded in essentially distinct or segment markets (bonds are not perfect substitutes)The trading of long-term borrowers and lenders determine rates on long-ter

49、m bonds. Similarly, the trading of short-term borrowers and lenders determine rates on short-term bonds. Various equilibrium rates (according to maturity of bonds) Their explanation of upward sloping yield curve? A:? This view of the market is not supported by empirical facts. It does not explain th

50、e shape of the yield curve (for low and high short term interest rates) and why yields on bonds of different maturities tend to move together (See Figure 5, p. 117,Mishkin et al.)29B) Market Segmentation Theory33032C) Liquidity Premium Theory The theory that investors demand a risk premium on longte

51、rm bonds. The risk premium required to hold longer term bonds is called liquidity premium Investors and firms are willing to hold these bonds. Why? A: Yield curve will be upward sloping even in the absence of any expectations of future increases in rates. If the liquidity preference theory is valid,

52、 the forward rate of interest is not a good estimate of market expectations of future interest rates. Why?A:31C) Liquidity Premium Theory33Pure Expectations Theory Yield CurveLiquidity Premium TheoryYield CurveInterest RateYears to MaturityRelationship between the Expectations Theory and the Liquidi

53、ty Premium TheoryLiquidity Premium5101520 25 30032Pure Expectations Theory LiquiWhat theory explains better the TSIR?The Liquidity premium theory explains better the empirical facts such as 1. That interest rates on different maturity bonds move together over time.2. That yield curves tend to be upw

54、ard sloping when short-term interest rates are low and to be inverted when short-term interest rates are high. 3. It explains that yield curves typically slope upward by recognizing that the liquidity premium rises with a bonds maturity (because of investors preferences for short-term bonds).33What

55、theory explains better thIn summaryThe liquidity premium theory predicts the behaviour of future short term interest rates by looking at the slope of the yield curve: 1. A steeply rising yield curve indicates that ST is are expected to rise in the future 2. A moderately rising yield curve indicates

56、that ST is are not expected to rise or fall much in the future. 3. A flat yield curve, indicates that ST is are expected to fall moderately in the future. 4. An inverted yield curve, indicates that ST is are expected to fall sharply in the future.34In summaryThe liquidity premiuYield curves and the

57、markets expectations of Future Short-Term Interest RatesYTM Term to Maturitya) Short term interest rates expected to riseYTM Term to Maturity b) Short term interest rates expected to stay the same (E.g. the YTM used is considered constant for each period in the computation of NPV projects) YTM Term to Maturityc) Short term interest rat