The Risk And Term Structure Of Interest Rates120

Preview 120

Risk Structure of Interest Rates 120

Default Risk 120

Application The Enron Bankruptcy and the Baa-Aaa Spread 124

Liquidity 125

Income Tax Considerations 125

Summary 127

Application Effects of the Bush Tax Cut on Bond Interest Rates 127

Term Structure of Interest Rates 127

Following the Financial News Yield Curves 128

Expectations Theory 129

Segmented Markets Theory 132

Liquidity Premium and Preferred Habitat Theories 133

Evidence on the Term Structure 136

Summary 137

Application Interpreting Yield Curves, 1980-2003 137

Summary, Key Terms, Questions and Problems, and Web Exercises 138

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