UA FI 301 - Chapter 3 Section 1 Yields (6 pages)

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Chapter 3 Section 1 Yields



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Chapter 3 Section 1 Yields

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Includes lecture notes for the first part of Chapter 3 on yields.


Lecture number:
5
Pages:
6
Type:
Lecture Note
School:
University of Alabama
Course:
Fi 301 - Intro Financl Instit Mkt
Edition:
1

Unformatted text preview:

Finance 301 1st Edition Lecture 5 Outline of Last Lecture I Factors that affect Interest Rates II Forecasting Interest Rates Outline of Current Lecture III Why debt security yields vary IV Yield Curve V Yield Differentials VI Yield Differentials On Money Market Securities VII Yield Differentials On Capital Market Securities VIII Estimating Appropriate Yield Current Lecture I Why debt security yields vary a Credit Default Risk securities with a higher degree of default risk offer higher yields i Rating Agencies Rating agencies charge the issuers of debt securities a fee for assessing default risk ii The risk that someone will default the risk that they cant pay it back iii STP iv Modys v FITCH these 3 companies trying to seize credits on bonds These companies got blamed for these bad ratings vi Oversight of Credit Rating Agencies The Financial Reform Act of 2010 vii b Liquidity How does this affect yield i Liquidity how quickly turn investment into cash without loosing value ii Affects interest rate you pay higher interest rate if less liquid c Tax Status Exhibit 3 2 Are investors more concerned with ATCF or BTCF i People can control their tax status ii Different tax brackets iii Example municipal bond and a corporate bond municipal bonds can pay out less lower interest rate where a corporate is higher municipal bond you don t have to pay taxes on they can give you less for returns Tax effects what interest rates are iv Computing the Equivalent Before Tax Yield 1 at bt 1 T d Term to Maturity Exhibit 3 3 Does term to maturity differ between securities How does this affect the yield i Yes it is different 3 month 10 yr treasury notes 30 yr treasury bonds 30 day treasury bill ii Higher pay outs with longer amount of times II Yield Curve a Return structure of interest rate important model because it shows the expectations of interest rates at any given point in time interest rate on one side time on the other b Several different shapes it can take c Upward sloping



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