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CH05The Financial Environment Markets, Institutions, and Interest Rates(财务管理,英文版)

发布时间:2014-02-14 16:09:41  

5-1

CHAPTER 5
The Financial Environment: Markets, Institutions, and Interest Rates ? Financial markets

? Types of financial institutions
? Determinants of interest rates

? Yield curves
Copyright ? 2001 by Harcourt, Inc. All rights reserved.

5-2

Define These Markets

? Markets in general
? Physical assets ? Financial assets ? Money vs. Capital ? Primary vs. Secondary ? Spot vs. Future
Copyright ? 2001 by Harcourt, Inc. All rights reserved.

5-3

Three Primary Ways Capital Is Transferred Between Savers and Borrowers

? Direct transfer ? Investment banking house

? Financial intermediary

Copyright ? 2001 by Harcourt, Inc.

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5-4

The Top 5 Banking Companies in the World, 1999
Bank Name
UBS Group Citigroup Bank of America Bank of Tokyo
Copyright ? 2001 by Harcourt, Inc.

Country
Switzerland

Total assets
$735 billion $687 billion

Deutsche Bank AG Germany

United States $669 billion United States $618 billion Japan $580 billion
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5-5

Physical Location Stock Exchanges vs. Electronic Dealer-Based Markets ? Auction market vs. Dealer market (Exchanges vs. OTC) ? NYSE vs. Nasdaq system

? Differences are narrowing

Copyright ? 2001 by Harcourt, Inc.

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5-6

? 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

Copyright ? 2001 by Harcourt, Inc.

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5-7

What four factors affect the cost of money?

? Production opportunities
? Time preferences for consumption ? Risk ? Expected inflation

Copyright ? 2001 by Harcourt, Inc.

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5-8

“Real” Versus “Nominal” Rates

k*

= Real risk-free rate. T-bond rate if no inflation; 1% to 4%.

k

= Any nominal rate.
= Rate on Treasury securities.

kRF

Copyright ? 2001 by Harcourt, Inc.

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5-9

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.
Copyright ? 2001 by Harcourt, Inc. All rights reserved.

5 - 10

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
Copyright ? 2001 by Harcourt, Inc. All rights reserved.

5 - 11

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.

Copyright ? 2001 by Harcourt, Inc.

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5 - 12

Treasury Yield Curve
Interest Rate (%)
15

1 yr 5 yr 10 yr 30 yr

5.2% 5.8% 5.9% 6.0%
Yield Curve (August 1999)

10

5

0

Years to Maturity
10 20 30
All rights reserved.

Copy

right ? 2001 by Harcourt, Inc.

5 - 13

Yield Curve Construction

Step 1:Find the average expected inflation rate over Years 1 to n:

? INFL
IPn =
t ?1

n

t

n

.

Copyright ? 2001 by Harcourt, Inc.

All rights reserved.

5 - 14

Suppose, that inflation is expected to be 5% next year, 6% the following year, and 8% thereafter.
IP1 = 5%/1.0 = 5.00%. IP10 = [5 + 6 + 8(8)]/10 = 7.50%. 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).
Copyright ? 2001 by Harcourt, Inc. All rights reserved.

5 - 15

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%.
Copyright ? 2001 by Harcourt, Inc. All rights reserved.

5 - 16

Step 3: Add the IPs and MRPs to k*:
kRFt = k* + IPt + MRPt . kRF = Quoted market interest rate on treasury securities.

Assume k* = 3%: kRF1 = 3.0% + 5.0% + 0.0% = 8.0%. kRF10 = 3.0% + 7.5% + 0.9% = 11.4%. kRF20 = 3.00% + 7.75% + 1.90% = 12.65%.
Copyright ? 2001 by Harcourt, Inc. All rights reserved.

5 - 17

Hypothetical Treasury Yield Curve
Interest Rate (%)
15
Maturity risk premium

1 yr 10 yr 20 yr

8.0% 11.4% 12.65%

10

Inflation premium

5
Real risk-free rate

0

Years to Maturity
1 10 20
All rights reserved.

Copyright ? 2001 by Harcourt, Inc.

5 - 18

What factors can explain the shape of this yield curve? ? This constructed yield curve is upward sloping. ? This is due to increasing expected inflation and an increasing maturity risk premium.

Copyright ? 2001 by Harcourt, Inc.

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5 - 19

What kind of relationship exists between the Treasury yield curve and the yield curves for corporate issues? ? Corporate yield curves are higher than that of the Treasury bond. However, corporate yield curves are not necessarily parallel to the Treasury curve. ? The spread between a corporate yield curve and the Treasury curve widens as the corporate bond rating decreases.
Copyright ? 2001 by Harcourt, Inc. All rights reserved.

5 - 20

Hypothetical Treasury and Corporate Yield Curves
Interest Rate (%)
15

BB-Rated
10

AAA-Rated
5.9%

5

5.2%

Treasury 6.0% yield curve

0

0

1

5

10

15

20

Years to maturity

Copyright ? 2001 by Harcourt, Inc.

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5 - 21

How does the volume of corporate bond issues compare to that of Treasury securities?
Billions of dollars
600 450 300 150

Gross U.S. Treasury Issuance (in blue) Investment Grade Corporate Bond Issuance (in red)

?95

?96

?97

?98

?99

Recently, the volume of investment grade corporate bond issues has overtaken Treasury issues.
Copyright ? 2001 by Harcourt, Inc. All rights reserved.

5 - 22

The Pure Expectations Hypothesis (PEH) ? Shape of the yield curve depends on the investors? expectations about future interest rates. ? If interest rates are expected to increase, L-T rates will be higher than S-T rates and vice versa. Thus, the yie

ld curve can slope up or down.
Copyright ? 2001 by Harcourt, Inc. All rights reserved.

5 - 23

? PEH assumes that MRP = 0. ? Long-term rates are an average of current and future short-term rates.

? If PEH is correct, you can use the yield curve to “back out” expected future interest rates.

Copyright ? 2001 by Harcourt, Inc.

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5 - 24

Observed Treasury Rates
Maturity 1 year 2 years 3 years 4 years 5 years Yield 6.0% 6.2% 6.4% 6.5% 6.5%

If PEH holds, what does the market expect will be the interest rate on one-year securities, one year from now? Three-year securities, two years from now?
Copyright ? 2001 by Harcourt, Inc. All rights reserved.

5 - 25

x%
6.0%

0

1 6.2%

2

3

4

5

(6.0% + x%) 6.2% = 2 12.4% = 6.0 + x%
6.4% = x%.

PEH tells us that one-year securities will yield 6.4%, one year from now (x%).
Copyright ? 2001 by Harcourt, Inc. All rights reserved.

5 - 26

6.2% 0 1 2

x%

3 4 5 6.5% [ 2(6.2%) + 3(x%) ] 6.5% = 5 32.5% = 12.4% + 3(x%) 20.1% = 3(x%) 6.7% = x%. PEH tells us that three-year securities will yield 6.7%, two years from now (x%).
Copyright ? 2001 by Harcourt, Inc. All rights reserved.

5 - 27

Conclusions about PEH ? Some argue that the PEH isn?t correct, because securities of different maturities have different risk. ? General view (supported by most evidence) is that lenders prefer S-T securities, and view L-T securities as riskier. ? Thus, investors demand a MRP to get them to hold L-T securities (i.e., MRP > 0).
Copyright ? 2001 by Harcourt, Inc. All rights reserved.

5 - 28

What various types of risks arise when investing overseas? Country risk: Arises from investing or doing business in a particular country. It depends on the country?s economic, political, and social environment. Exchange rate risk: If investment is denominated in a currency other than the dollar, the investment?s value will depend on what happens to exchange rate.
Copyright ? 2001 by Harcourt, Inc. All rights reserved.

5 - 29

Two Factors Lead to Exchange Rate Fluctuations 1. Changes in relative inflation will lead to changes in exchange rates. 2. An increase in country risk will also cause that country?s currency to fall.

Copyright ? 2001 by Harcourt, Inc.

All rights reserved.


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