Tiền tệ ngân hàng FTU - Lý thuyết chương 4

Content • • • • • • • • • • • • Lecture 4 The Risk and Term Structure of Interest Rates Introduction The risk structure of interest rates Default risk Ratings Ratings and interest rates Liquidity Differences in tax status and municipal bonds The term structure of interest rates Yield curves Expectations theory Segmented markets theory Liquidity premium theory 1 Readings 2 Introduction • Mishkin (2021), The Economics of Money, Banking, and Financial Markets, 13th edition, Pearson, Chapter 6. • Cecchetti and Schoenholtz (2012), Money, Banking, and Financial Markets, 4th edition, McGraw-Hill, Chapter 7. 3 • In the previous lecture, we examined the determination of just one interest rate. Yet there are enormous numbers of bonds on which the interest rates can and do differ • Not all interest rates are created equal! We have many interest rates at one time. But interest rates do move together over time • Why do interest rates differ? • Risk structure: bonds/debt with same maturity but different characteristics • Term structure: bond with same characteristics but different maturities • Difference between two interest rates is called spread, which is normally measured in 4 percentage points or basis points Introduction Introduction 5 6 cấu trúc rủi ro Risk Structure of Interest Rates Risk Structure of Interest Rates Bonds with the same maturity have different interest rates due to: Default risk: probability that the issuer of the bond is unable or unwilling to make interest payments or pay off the face value – Default risk – Liquidity – Tax considerations Default risk of a bond depends on (i) the creditworthiness of the issuer, and (ii) the structure of the bond – U.S. Treasury bonds are considered default free (government can raise taxes). 7 – Risk premium: the spread between the interest rates on bonds with default risk and the interest rates on (same maturity) Treasury bonds 8 Figure 2 Response to an Increase in Default Risk on Corporate Bonds 9 Ratings Ratings • The top four categories are considered investment- • Independent companies (rating agencies) have arisen to evaluate the creditworthiness of potential borrowers • The best known bond rating services are Moody’s, Standard & Poor’s, Fitch • They monitor the status of individual bond issuers and assess the likelihood a lender will be repaid by the bond issuer • A high rating suggests that a bond issuer will have little problem meeting a bond’s payment obligations • Firms or governments with an exceptionally strong financial position carry the highest ratings and are able to issue the highest-rated bonds, Triple A • E.g., the U.S. Government, ExxonMobil, Microsoft 10 grade bonds • Speculative grade bonds are bonds issued by companies and countries that may have difficulty meeting their bond payments but are not at risk of immediate default • Highly speculative bonds include debts that are in serious risk of default • Both speculative grades are often referred to as junk bonds or high-yield bonds 11 12 TABLE 1 Bond Ratings by Moody’s, Standard and Poor’s, and Fitch Ratings • The distinction between investment-grade and speculative, noninvestment-grade bonds is important A number of regulated institutional investors are not allowed to invest in bonds rated below Baa on Moody’s scale or BBB on Standard and Poor’s scale • Bond ratings may change over time. Material changes in a firm’s or government’s financial conditions precipitate changes in its debt ratings Ratings downgrade - lower an issuer’s bond rating. Ratings upgrade - upgrade an issuer’s bond rating 13 14 The Impact of Ratings on Yields Bond ratings are designed to reflect default risk. The lower the rating – The higher the risk of default. – The lower its price and the higher its yield. To understand quantitative ratings, it is easier to compare them to a benchmark. 15 16 The Impact of Ratings on Yields The Impact of Ratings on Yields U.S. Treasury issues are the closet to risk-free and are commonly referred to as benchmark bonds. Yields on other bonds are measured in terms of the spread over Treasuries. Bond yield is the sum of two parts: = U.S. Treasury yield + Default risk premium If bond ratings properly reflect risk, then the lower the rating if the issuer, the higher the default-risk premium. When Treasury yields move, all other yields move with them. We can see this from the next figure showing a plot of the risk structure of interest rates. 17 The Impact of Ratings on Yields 18 The Impact of Ratings on Yields Changes in the U.S. Treasury yields account for most of the movement in the Aaa and Baa bond yields. From 1979-2009, the 10-year U.S. Treasury bond yield has averaged almost a full percentage point below the average yield on Aaa bonds and two percentage points below the average yield on Baa bonds. 7-19 19 20 The Impact of Ratings on Yields A two-percentage point increase in the yield, from 5 to 7 percent, lowers the value of the promise of $100 in 10 years by $10.56, or 17 percent. Clearly ratings are crucial to corporations’ ability to raise financing. Companies aren’t the only ones with credit ratings: you have one too. There are companies keeping track of your financial information. All this information is combined into a credit score, which you should care about. The better your credit score, the lower the interest rate you will pay on debt. – A lower rate increases the costs of funds. Investors clearly must be compensated for assuming risk. 21 Sovereign Defaults 22 Sovereign Defaults 23 24