Chapter 6
The Risk and Term Structure
of Interest Rates
Preview:
There are numbers of different interest rates
These interest rates differ from each other
because of different risks and terms.
Ⅰ Risk Structure of Interest Rates
ⅰ Default risk—occurs when the issuer
of the bond is unable or unwilling to
make interest payments or pay off the face
value
U.S. T-bonds considered default free
Risk premium—the spread between the
interest rates on bonds with default risk
and the interest rates on T-bonds
Case study
Enron bankruptcy
ⅱ Credit-rating Agencies
Default risk measurement
The origin of Dun & Bradstreet company
Case study:
Sub–loan crisis
asset securitization
ⅲ Liquidity Effect
Liquidity—the ease with which an asset
can be converted into cash
