Escolar Documentos
Profissional Documentos
Cultura Documentos
Interest Rates
Determinants of interest
rates
The term structure and
yield curves
Investing overseas
6-1
Production
opportunities
Time preferences
for consumption
Risk
Expected inflation
6-2
r*
rRF
Determinants of interest
rates
r = r* + IP + DRP + LP + MRP
r
= required return on a debt security
r* = real risk-free rate of interest
IP = inflation premium
DRP = default risk premium
LP = liquidity premium
MRP= maturity risk premium
6-4
MR DRP LP
P
6-5
Term structure
relationship
between interest
rates (or yields)
and maturities.
The yield curve is a
graph of the term
structure.
The November
2005 Treasury
yield curve is
shown at the right.
6-6
IPN
INFL
t 1
6-7
MRPt 0.1% ( t - 1 )
6-9
10
Inflation premium
5
Real risk-free rate
0
1
An upward
sloping yield
curve.
Upward slope due
to an increase in
expected inflation
and increasing
maturity risk
premium.
Years to
10
20 Maturity
6-12
BB-Rated
10
AAA-Rated
Treasury
6.0% Yield Curve
5.9%
5.2%
Years to
0
0
10
15
20
Maturity
6-14
Pure Expectations
Hypothesis
An example:
Observed Treasury rates and the
PEH
Maturity Yield
1
2
3
4
5
year
years
years
years
years
6.0%
6.2%
6.4%
6.5%
6.5%
x%
1
6.2%
x%
2
6.5%
6-21
Score
Switzerland
95.2
Ran Country
k
Luxembourg
93.9
169 Afghanistan
United States
93.7
170 Liberia
9.4
Norway
93.7
9.3
8.9
8.2
6-23