Créer une présentation
Télécharger la présentation

Download

Download Presentation

Financial markets Types of financial institutions Determinants of interest rates Yield curves

183 Vues
Download Presentation

Télécharger la présentation
## Financial markets Types of financial institutions Determinants of interest rates Yield curves

- - - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - - -

**The Financial Environment:**Markets, Institutions,and Interest Rates • Financial markets • Types of financial institutions • Determinants of interest rates • Yield curves**Define the following terms:**• Financial vs. physical asset markets • Money vs. capital markets • Primary vs. secondary markets**Financial VS Physical asset Markets**• Financial (Asset) Markets- the markets where financial assets are traded. • Physical Asset Markets- the markets where physical (real) assets are traded.**Money VS Capital Markets**• Money Markets-The financial markets in which funds are borrowed or loaned for short periods (< or = 1 year). • Capital Markets- The financial markets for stocks and long-term debt (>1 year).**Primary VS Secondary Markets**• Primary Markets-Markets in which corporations raise funds by issuing new securities • Secondary Markets- Markets in which securities and other financial assets are traded among investors after they have been issued by corporations and public agencies such as municipalities.**Three Primary Ways Capital Is Transferred Between Savers and**Borrowers • Direct transfer • Investment banking house • Financial intermediary**Major Financial Intermediaries**• Commercial Banks • Life insurance company • Mutual funds • Financial company**Stock Market**• NYSE • Stock Exchange of Thailand**What do we call the price, or cost, of debt capital?**The interest rate • What do we call the price, or cost, of equity capital? Required Dividend Capital return yield gain = + .**What four factors affect the cost of money?**• Production opportunities - Economic situation • Time preferences for consumption • Risk - High risk, high cost • Expected inflation - high inflation,high cost**“Real” Versus “Nominal” Rates**= Real risk-free rate. T-bill rate if no inflation; 1% to 4%. = Any nominal rate. = Rate on Treasury securities. k* k kRF**k = k* + IP + DRP + LP + MRP.**Here: k = Required rate of return on a debt security. k* = Real risk-free rate. IP = Inflation premium. DRP = Default risk premium. LP = Liquidity premium. MRP = Maturity risk premium.**Premiums Added to k* for Different Types of Debt**• S-T Treasury: only IP for S-T inflation • L-T Treasury: IP for L-T inflation, MRP • S-T corporate: S-T IP, DRP, LP • L-T corporate: IP, DRP, MRP, LP**What is the “term structure of interest rates”? What is**a “yield curve”? • Term structure: the relationship between interest rates (or yields) and maturities. • A graph of the term structure is called the yield curve.**Interest**Rate (%) T-Bond Yield Curve 15 1 yr 6.1% 5 yr 6.6% 10 yr 7.0% 20 yr 7.5% Yield Curve (May 1999) 10 5 Years to Maturity 0 5 10 15 20**Yield**curve 1-yr 30-yr k S k k S D D Q Q 1 30 Maturity**Constructing the Yield Curve**Example data: • Inflation for Year 1 is 5%. • Inflation for Year 2 is 6%. • Inflation for Year 3 and beyond is 8%. k* = 3%. MRPt = 0.1%(t - 1).**Step 1: Find the average expected inflation rate over**years 1 to n: n SINFLt t = 1 n IPn = .**IP1 = 5%/1.0 = 5.00%.**IP10 = [ 5 + 6 + 8(8)]/10 = 7.5%. IP20 = [ 5 + 6 + 8(18)]/20 = 7.75%. Must earn these IPs to break even vs. inflation; these IPs would permit you to earn k* (before taxes).**Step 2: Find MRP based on this equation:**MRPt = 0.1%(t - 1). MRP1 = 0.1% x 0 = 0.0%. MRP10 = 0.1% x 9 = 0.9%. MRP20 = 0.1% x 19= 1.9%.**Step 3: Add the IPs and MRPs to k*:**kT = k* + IPt + MRPt. kT = Quoted market interest rate on Treasury securities. Assume k* = 3%: 1-Yr: kT1 = 3% + 5% + 0.0% = 8.0%. 10-Yr: kT10= 3% + 7.5% + 0.9% = 11.4%. 20-Yr: kT20= 3% + 7.75% + 1.9% = 12.7%.**Yield Curve Examples**Continental Airlines (Junk) Interest Rate (%) Exxon (AAA) 15 Treasury yield curve 12.7% 11.4% 10 8.0% 5 Years to maturity 0 1 5 10 15 20