ࡱ> zQu;  !"#$%&'()*+,-./0123456789:<=>?@ABCDEFGHIJKLMNOPQRSTUVWXYZ[\]^_`abcdefghijklmnopqrstuvwxy{|}~Root Entryb.@p7̖@PerfectOffice_MAIN& PerfectOffice_OBJECTS,n̖n̖SummaryInformation(hOh+'Oh+'08  ( 4Jim FrederickJim Frederick2 Original Slide Show @  Q Qc 6Times New Roman Regularc        @  SubtitleofShowWPCu*XX81%N0A#ބ3'XXXXKKWPC  ~ :JEK&:rHrKttt KC;|B"XXXX'33' B'  :L-enmKIgr5"#%:'5)+Y/s2B68:E=@I`ACGWPC ( (2  I  .3  ECN304Chapter7....2  1  .3  RiskandTermStructuresofInterestRates( (2  I  .3  KeyTopics..2  A  .3  Defaultrisk....2  1  .3  Moody's,Standard&Poor'sratingscales....2  1  .3  Riskpremium....2  1  .3  Junkbondsvs.investment-gradebonds....2  1  .3  Riskstructureofinterestrates..2  A  .3  Termstructureofinterestrates....2  1  .3  Yieldcurve....2  1  .3  Expectationshypothesis....2  1  .3  Segmented-marketshypothesis....2  1  .3  Liquidity-premiumtheory....2  1  .3  Preferred-habitattheory..2  A  .3  c&d9 Z6Times New Roman RegularcOther:liquidity,taxtreatment-# -2  I  .3  c&d9 Z6Times New Roman Regularc DefaultRisk....2  1  .3  c&d9 Z6Times New Roman RegularcDefinition..2  A  .3  Thefailureofaborrowertomakeascheduledpaymentontime.,"  ,2  I  .3  c&d9 Z6Times New Roman Regularc RatingDefaultRisk-#   -2  I  .3  c&d9 Z6Times New Roman Regularc RatingDefaultRisk....2  1  .3  c&d9 Z6Times New Roman RegularcNotesaboutratingsystems..2  A  .3  BestratingineachsystemistripleA:AaaorAAA..2  A  .3  LowestratingisCforMoody's,butDforStandard&Poor's..2  A  .3  Lowestinvestment-graderatingisBaaorBBB'    '2  I  .3  c&d9 Z6Times New Roman Regularc RiskStructure'  &  '2  I  .3  RiskStructure(    (2  I  .3  c&d9 Z6Times New Roman Regularc TermStructureofInterestRates..2  A  .3  "Term"istermtomaturityremaining,nottheoriginalterm..2  A  .3  Assetscomparedshouldbesimilarinallotherrespects(risk,liquidity)..2  A  .3  Showngraphicallyasthe"yieldcurve"'   '2  I  .3  c&d9 Z6Times New Roman Regularc YieldCurve'   '2  I  .3  YieldCurve--logscale# +,#2  I  .3  c&d9 Z6Times New Roman Regularc ThreeEmpiricalFacts..2  A  .3  1.Comovement:Short-termandlong-termyieldstendtomovetogether;theyieldcurveshifts...2  A  .3  2.Short-term/SlopeRelation:Whenshort-termyieldsarelow,theyieldcurveisusuallyupwardsloping...2  A  .3  3.PositiveSlope:Yieldcurvesalmostalwaysareupwardsloping.-# -2  I  .3  c&d9 Z6Times New Roman Regularc ExplainingtheYieldCurve....2  1  .3  c&d9 Z6Times New Roman RegularcEconomists'tealeaves..2  A  .3  Pureexpectationstheory..2  A  .3  Market-segmentationtheory..2  A  .3  Liquidity-premiumtheory..2  A  .3  Preferred-habitattheory-# -2  I  .3  c&d9 Z6Times New Roman Regularc PureExpectationsTheory....2  1  .3  c&d9 Z6Times New Roman RegularcAssumptions..2  A  .3  Long-termbondsareperfectsubstitutesforshort-termbonds..2  A  .3  Theonlybasisforchoosingalong-termoraseriesofshort-termbondsistheexpectedreturn..2  A  .3  Competitionequatestheyieldsonlong-termandshort-termbonds'  '2  I  .3  c&d9 Z6Times New Roman Regularc PureExpectationsTheory..2  A  .3  CompetitionsetsiLT+iLT=4%+8%..2  A  .3  iLTmustbe6%..2  A  .3  c&d9 Z6Times New Roman RegularcTheequationaboveisapproximatec&d9 Z6Times New Roman Regularc..2  A  .3  c&d9 Z6Times New Roman RegularcActually,(1+iLT)(1+iLT)=(1+.04)(1+.08)c&d9 Z6Times New Roman Regularc..2  A  .3  Whenratesareexpectedtorise,iLT>iST," 34  ,2  I  .3  c&d9 Z6Times New Roman Regularc PureExpectationsTheory..2  A  .3  Thereissubstitutabilitybetweenlong-termbondsandshort-termbonds.Whatwillinvestorsdo?," 56  ,2  I  .3  c&d9 Z6Times New Roman Regularc PureExpectationsTheory..2  A  .3  Investorsshiftfromshort-termtolong-term...2  A  .3  Short-termyieldsrise;long-termyieldsfall.Untilequalized.1'  12  I  .3  PureExpectationsTheory....2  1  .3  c&d9 Z6Times New Roman RegularcExample..2  A  .3  7%+13%=iLT+iLT=2iLT..2  A  .3  iLT=20%2=10%,"  ,2  I  .3  PureExpectationsTheory....2  1  .3  c&d9 Z6Times New Roman RegularcExample..2  A  .3  7%+4%=iLT+iLT=2iLT..2  A  .3  iLT=11%2=5.5%' !" '2  I  .3  PureExpectationsTheory..2  A  .3  Risingyieldcurve:risinginterestratesexpected..2  A  .3  Flatyieldcurve:steadyinterestratesexpected..2  A  .3  Invertedyieldcurve:fallinginterestratesexpected,"   ,2  I  .3  PureExpectationsTheory....2  1  .3  c&d9 Z6Times New Roman RegularcExample:theTeaLeaves..2  A  .3  9%+9%=8%+ie'00..2  A  .3  ie'00=18%8%=10%..2  A  .3  10%+10%+10%=9%+9%+ie'01..2  A  .3  ie'01=30%18%=12%c&d9 Z6Times New Roman Regularc -# 012-2  I  .3  PureExpectationsTheory....2  1  .3  CanitExplaintheThreeFacts?..2  A  .3  Comovement:Becauseofsubstitutability,investordemandshiftstoequalizeyields...2  A  .3  Short-term/SlopeRelation:Investorsexpecthighorlowinterestratestoreturntonormal.HighiSTimpliesiSTisexpectedtofall...2  A  .3  PositiveSlope:Cannotexplain.Impliesinvestorsusuallyexpectratestorise.Unrealistic.( #$%(2  I  .3  Segmented-MarketsTheory....2  1  .3  c&d9 Z6Times New Roman RegularcAssumptions..2  A  .3  Short-term,medium-term,andlong-termbondsarenotsubstitutesforeachother...2  A  .3  Someinvestorswantonlyshort-termbonds.Otherswantonlylong-term...2  A  .3  Competitiondoesnotequateyields.c&d9 Z6Times New Roman Regularc ..2  A  .3  Long-termyieldsdon'tinfluenceshort-termyieldsatall.( '((2  I  .3  Segmented-MarketsTheory..2  A  .3  Lenderswhoprefershort-term....2  1  .3  Banks....2  1  .3  ..2  A  .3  Lenderswhopreferlong-term....2  1  .3  Pensionfunds....2  1  .3  Life-insurancecompanies' )*  '2  I  .3  c&d9 Z6Times New Roman Regularc Segmented-MarketsTheory..2  A  .3  Marketsfordifferentmaturitiesaredifferentandshouldnotbeexpectedtohaveequalyields.-# -./-2  I  .3  SegmentedMarkets....2  1  .3  CanitExplaintheThreeFacts?..2  A  .3  Comovement:Cannotexplainthis.Ifmarketsaresegmented,theyshouldnotaffecteachother...2  A  .3  Short-term/SlopeRelationship:Cannotexplainthis...2  A  .3  PositiveSlope:Canexplainthis.Thedemandforshort-termbondsseemstobegreaterthanforlong-termbonds.(789(2  I  .3  LiquidityPremiumTheory....2  1  .3  Assumptions..2  A  .3  Long-termbondsaregoodsubstitutesforshort-termbonds.....2  A  .3  EXCEPTthatinvestorswantaliquiditypremiumtoinvestinlongertermbonds...2  A  .3  (Thetermill-liquiditypremiumwouldbemoreaccurate.)..2  A  .3  Similartopureexpectationstheory.1'+=>?  12  I  .3  LiquidityPremiumTheory....2  1  .3  DeterminingYields..2  A  .3  Actuali4=3%+7%=10%(:;<(2  I  .3  LiquidityPremiumTheory....2  1  .3  CanitExplaintheThreeFacts?..2  A  .3  Comovement:Long-termyieldsareshort-termyieldsplusthepremium...2  A  .3  Short-term/SlopeRelation:Sameaspureexpectationstheory'sexplanation...2  A  .3  Positiveslope:Duetoincreasingliquiditypremiumforlongerterms.(@AB(2  I  .3  PreferredHabitatTheory....2  1  .3  Assumptions..2  A  .3  Short-termbondsandlong-termbondsaresubstitutesforeachother(butnotperfectsubstitutes)...2  A  .3  Someinvestorsprefershort-termorlong-termbonds,buttheywillbuyothersiftheyieldsareattractive...2  A  .3  c&d9 Z6Times New Roman Regularc(Ablendofthepureexpectationsandmarketsegmentationtheories.)c&d9 Z6Times New Roman Regularc(CDE(2  I  .3  PreferredHabitatTheory....2  1  .3  CanitExplaintheThreeFacts?..2  A  .3  Comovement:Sameasthepureexpectationstheory'sanswer...2  A  .3  Short-term/SlopeRelation:Sameasthepureexpectationstheory'sanswer...2  A  .3  PositiveSlope:similartotheliquiditypremiumtheoryorthemarketsegmentationtheory. 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Roman Regularc        @0..Short-term/SlopeRelation:Sameaspureexpectationstheory'sexplanation.c&d9 Z6Times New Roman Regularc        @    c&d9 Z6Times New Roman Regularc        @0..Positiveslope:Duetoincreasingliquiditypremiumforlongerterms.WPCDXX81%XX81%3'XXXX,,,,9ms"0j$ 0j$  0j$.)*+%'153 .#c&d9 Z6Times New Roman Regularc         @  Q Qc&d9 Z6Times New Roman Regularc LiquidityPremiumTheory.+%1 `00WPCXX81%XX81%3'XXXX,,,,9ms"0w 0w  0w.+%1 @.c&d9 Z6Times New Roman Regularc        @  Q Qc&d9 Z6Times New Roman RegularcDeterminingYieldsWPCXX81%XX81%3'XXXX,,,,9ms"?P0 ?P0  ?P0 ?/ c&d9 Z6Times New Roman Regularc        @  Q Qc&d9 Z6Times New Roman RegularcActuali4=3%+7%=10%WPCXX81%XX81%܄3'XXXXKKKK9 ("Ԅ0l$0l$W &d9 Z6Times New Roman Regular +W &d9 Z6Times New Roman Regular +W &d9 Z6Times New Roman Regular +W &d9 Z6Times New Roman Regular +W &d9 Z6Times New Roman Regular +W &d9 Z6Times New Roman Regular +)?   4 @ @ @ @ @ @ " dddddd$   Ԅ0l$-)*+%'153 e.#c&d9 Z6Times New Roman Regularc         @  Q 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Yield Curveh--e"Arial- .!August 13, 1999---D"Arial- .   ---'WPCkXX81%,+3'XXXX,,,,5/ @1 DDD@ ?"""333DDDUUUfffwwwMf33MMffM&f3@MYfs3Mf̙ٳMMff3Mf&M3f@MYfs3MfMf33MMffM&f3@MYfs3MfMMff3Mf&M3f@MYfs3MfMf33MMff&M3f@MYfs3Mf̙ٳMMff3MfM&f3@MYfs3MfpJ&T0Z4`8f<k@pEzJ̉]٘p槂Ħϰֿfffffffffrffffrffffff9-+%1!+Y(- "ل4A'R4E'-$4E'&&&%E'-!"&*(- "ڄ GVGR J\J-$ \J J\J-!?)!(- "ۄ4GVGR4J[J-$4[J J[J--'"܄ 3m c 6Times New Roman Regularc        @iLT"ބ Ty c 6Times New Roman Regularc        @8%"߄hn#Rc 6Times New Roman Regularc        @4%"ac 6Times New Roman Regularc        @Two-yearbond"S c 6Times New Roman Regularc        @2One-yearbonds ℿ",B)~c 6Times New Roman Regularc        @c 6Times New Roman RegularcExpected"3m c 6Times New Roman Regularc        @iLTWPCXX81% .aބ3'XXXX,,,,5/ @1 DDD@ ?"""333DDDUUUfffwwwMf33MMffM&f3@MYfs3Mf̙ٳMMff3Mf&M3f@MYfs3MfMf33MMffM&f3@MYfs3MfMMff3Mf&M3f@MYfs3MfMf33MMff&M3f@MYfs3Mf̙ٳMMff3MfM&f3@MYfs3MfpJ&T0Z4`8f<k@pEzJ̉]٘p槂Ħϰֿfffffffffrffffrffffff9+%'1"ۄM3Z.c 6Times New Roman Regularc        @Yieldonaone-yearbondnowis7%.Expectedyieldonaone-yearbondayearfromtodayis13%.Accordingtotheexpectationshypothesis,whatistheyieldontwo-yearbondstoday?WPCXX81% .߄3'XXXX,,,,5/ @1 DDD@ ?"""333DDDUUUfffwwwMf33MMffM&f3@MYfs3Mf̙ٳMMff3Mf&M3f@MYfs3MfMf33MMffM&f3@MYfs3MfMMff3Mf&M3f@MYfs3MfMf33MMff&M3f@MYfs3Mf̙ٳMMff3MfM&f3@MYfs3MfpJ&T0Z4`8f<k@pEzJ̉]٘p槂Ħϰֿfffffffffrffffrffffff9+%'1"ۄ34.c 6Times New Roman Regularc        @YieldonbonddueinAug.2000is7%.Expectedyieldonaone-yearbondtobeboughtinAug.2000is4%.Accordingtotheexpectationshypothesis,whatistheyieldonabonddueinAug.2001?WPCXX81% 03'XXXX,,,,5/ @1 DDD@ ?"""333DDDUUUfffwwwMf33MMffM&f3@MYfs3Mf̙ٳMMff3Mf&M3f@MYfs3MfMf33MMffM&f3@MYfs3MfMMff3Mf&M3f@MYfs3MfMf33MMff&M3f@MYfs3Mf̙ٳMMff3MfM&f3@MYfs3MfpJ&T0Z4`8f<k@pEzJ̉]٘p槂Ħϰֿfffffffffrffffrffffff9+%'1"ۄO3 hc 6Times New Roman Regularc        @MaturityYieldAug.'00..[8%Aug.'01..[9%Aug.'02..10%"ބy:@ w07Fc 6Times New Roman Regularc        @Whataretheexpectedyieldsonone-yearbondsboughtinAug.'00?Aug.'01?WPCXX81%i0 3'XXXX,,,,5/ @1 DDD@ ?"""333DDDUUUfffwwwMf33MMffM&f3@MYfs3Mf̙ٳMMff3Mf&M3f@MYfs3MfMf33MMffM&f3@MYfs3MfMMff3Mf&M3f@MYfs3MfMf33MMff&M3f@MYfs3Mf̙ٳMMff3MfM&f3@MYfs3MfpJ&T0Z4`8f<k@pEzJ̉]٘p槂Ħϰֿfffffffffrffffrffffff9+%1&*eB`  (*ׁJ   (*3-  @*xn j n Hr + F  ~*/4*R|$B$B$B-B-B-B@*a &$W%%&C()V+L.0t@*a & %JW% %&C(d)8<,=/>2' i$c 6Times New Roman Regularc        @Whatdospeculatorsexpect?WPCfXX81%m',{g3'XXXX,,,,5/ @1 DDD@ ?"""333DDDUUUfffwwwMf33MMffM&f3@MYfs3Mf̙ٳMMff3Mf&M3f@MYfs3MfMf33MMffM&f3@MYfs3MfMMff3Mf&M3f@MYfs3MfMf33MMff&M3f@MYfs3Mf̙ٳMMff3MfM&f3@MYfs3MfpJ&T0Z4`8f<k@pEzJ̉]٘p槂Ħϰֿfffffffffrffffrffffff9!**e,ngb A*{"`IPRPQuattroPro.Graph.6Lࡱ>   !"#$Root EntryFC9Ole ;CompObjnBOlePart+F! WPPRWin[101] FQuattro Pro 6.0 Graph Embed SourceQuattroPro.Graph.69qABOlePres000QuattroPro.Notebook.6,~(3.#l 6   #3..- !Y  - "- "- "-- "- --"Systemn-"Arial- .-- .-- .-- .-- .--"Arial- .-- .--"Arial- .-- .-- "-<-- "-   99-"Arial- .-.-   -!5 --9-888-8889-!6 --9-ddd-ddd9-!7 ---9--9-!8 Z-'''-'''9--9-!9 -SSS-SSS9--9-!10 --9--!11 ..--"Arial- ...-- ..---"Arial- .."""!Govt""N"NNNN"N!AAA"N"""!A""q"qqqq"q!BB"q..-- ..-- .- "- %UN'q--- "-eF--^?--7--b-- ..- "- %BNyq--- "-R3--^j?--"--wb-- ..--- "-c!%--$!0!cch%h%0-- ..- "-c---Dq% !Aug 13- "-}}}c---Dn% !Aug 12---   X                'M?/23$ Arial]Ш"oT0gc3(+$Arial]Ш"oT0gc3(+$ Arial]Ш"oT0gc3(+@TMonth' 'D', 'YYYY Normal Comma Currency Percent Fixed DateHeading 1Heading 2 Total Comma0 Currency0 033@ R033@ 2033@ B033@ 033@ x033@ 033@ 033@ 0 33@ P033@ 0033@ 033@d#Y!_]<  ?q~HqQ$  A   ?      H`?bQ4V@EX,b PPH\ 6HeRd]/L!R|_G)v-Hdp),S6RiT*ʦȤ} t*;%gZmVe>" B qer&`Hb" 2`BIⱨt_s=& whc8Gid"adM<2Z8lJ :  CpCAQ,+ i~V\a%RnqX.B?q$cA~F)sɲ $K,'KO3L5͓l79Γ;=ϓ?hڂ*'""" "  3  $        Mq  d2X, X1Axis? Ms  d2X, Y1Axis?  Mt  d2X, Y2Axis? vj  d2X, 1PaneLeftWallRightWallBaseSeriesSeriesLabel?  Rm  d2X,  X1Title? `YRo  d2X,  Y1Title? aYRp  d2X,  Y2Title? AaYMl  d2X, Legend? }LZ   Title?$Arial,Arial "]ZY yc990813!_]<  ?w#GqQ$  A*   ?     F( .DbQ8- #p,3d0`͑Id]/ XfL'SxR G^?& Mb@?  #  f g i2  -./g 0d ww ww ww wFwPxwwwnwd6$u<7~7[\? NRisk Structure from WSJ Aug 16, 1999, p. C21, for Aug. 13 and 12, 1999RatingTreasury 1-10 yr.P"High Qual (AAA-AA) 1-10 yr&Med Qual (A-BBB/Baa) 1-10 yrs,High Yield (BB/Ba-C1 aGovt aAAA aA aBB ` ` `  `  `  `  `  ` ` ` ` ` ` ` ` ` ` ` ` ` ` ` ` ` ` `  ` !` "` #` $` %` &` '` (` )` *` +` ,` -` .` /` 0` 1` 2` 3` 4` 5` 6` 7` 8` 9` :` ;` <` =` >` ?`Aug 13q= ףp@333333@)\(@\($@Aug 12q@@(\@q= ף$@$u<7~7[\ jTerm Structure for U.S. Gov't Securities from WSJ Aug. 16, 1999, p. 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