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    EIFM Tutorial 3

    Uploaded by

    Chi Yen
    This document discusses interest rates and risk premiums on bonds of different credit ratings and from different issuers. It also addresses expectations theory of the term structure and how demand for different term bonds and expectations of future interest rates and inflation impact yield curves.

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    EIFM Tutorial 3

    Uploaded by

    Chi Yen
    35 views2 pages
    This document discusses interest rates and risk premiums on bonds of different credit ratings and from different issuers. It also addresses expectations theory of the term structure and how demand for different term bonds and expectations of future interest rates and inflation impact yield curves.

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    © © All Rights Reserved

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    DOCX, PDF, TXT or read online from Scribd

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    This document discusses interest rates and risk premiums on bonds of different credit ratings and from different issuers. It also addresses expectations theory of the term structure and how demand for different term bonds and expectations of future interest rates and inflation impact yield curves.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    35 views2 pages

    EIFM Tutorial 3

    Uploaded by

    Chi Yen
    This document discusses interest rates and risk premiums on bonds of different credit ratings and from different issuers. It also addresses expectations theory of the term structure and how demand for different term bonds and expectations of future interest rates and inflation impact yield curves.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
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    EIFM Tutorial 3: The term and risk structure of interest rates

    1. Which government bond should have a higher risk premium on its interest rates, a
    German bond with an S&P rating of AAA or an Italian bond with a rating of BBB? Why?
    2. In the aftermath of the 2008-2009 crisis, Lloyds Bank, one of the largest banks in the
    United Kingdom, was at risk of defaulting after incurring huge losses. The UK
    government decided to rescue the bank from an imminent collapse with capital injections
    and an ownership stake. How would this affect, if at all, the yield and risk premium on
    Lloyds corporate debt?
    3. During the Eurozone debt crisis, the credit rating agencies were subject to criticism for
    very high and loose ratings on European sovereign bonds, especially Greece. Only 1
    year before default, Greece was rated BB+ by two of the three rating agencies. Should
    we always trust rating agencies?
    4. In Germany, suppose that the state of North Rhine-Westphalia issues a tax-exempt bond
    for German investors. How would its interest rate compare to a bond that is not exempt
    from taxes issued by the state of Baden-Württemberg?
    5. If bond investors decide that 30-year bonds are no longer as desirable an investment as
    they were previously, predict what will happen to the yield curve, assuming (a) the
    expectations theory of the term structure holds and (b) the segmented markets theory of the
    term structure holds.
    6. Suppose the interest rates on one-, five-, and ten-year German government bonds are
    currently −0.5%, −0.3%, and 0%, respectively. Hans chooses to hold only one-year
    bonds, and Dietrich is indifferent to holding five- and ten-year bonds. How can you
    explain the behavior of Hans and Dietrich?
    1 year: -0,5%
    5 year: -0,3%
    10 year:0%
    Hans is risk loving, Dietrich is risk taking
    7. If a yield curve looks like the one shown in the figure below, what is the market
    predicting about the movement of future short-term interest rates? What might the yield
    curve indicate about the market’s predictions for the inflation rate in the future?
    Demand for bonds increase -> price of bonds increase -> yields increase
    inflation high => Interest rate high => yields of bonds high
    mua lãi suất trái phiếu 1, 5 và 10 năm bằng nhau => kỳ vọng inflation trong 5 năm và 10
    năm đó ko đổi
    8. Assuming the expectations theory is the correct theory of the term structure, calculate the
    interest rates in the term structure for Spanish government maturities of one to five years,
    and describe the resulting yield curves for the following paths of one-year interest rates
    over the next five years:
    a. −0.2%, −0.1%, 0%, 0.1%, 0.2%
    2năm :( −0.2%−0.1%)/2 = -0.15
    3 năm: (-0.2%−0.1%+ 0%)/3= -0.15
    4 năm : (−0.2%, −0.1%, 0%, 0.1%)/4 = -0.175
    5 năm: (−0.2% −0.1% +%,+0.1%+0.2%)/5=0
    Đường yield curve đi ngang theo hướng lên
    b. 0%, −0.2%, −0.3%, −0.2%, 0%
    2y = -0.1
    3y = -0.17
    4y = -0.18
    5y = -0.12
    Đường yield curve dạng parabol hướng lên
    Demand of bond tăng => price tăng => yield giảm
    How would your yield curves change if people preferred shorter-term bonds over longer-
    term bonds?
    Tính Expected real yield bằng cách lấy gtri TB
    9. Go to the St. Louis Federal Reserve FRED database and find data on Moody’s Aaa
    corporate bond yield (AAA) and Moody’s Baa corporate bond yield (BAA). Download the
    data into a spreadsheet.
    a. Calculate the spread (difference) between the Baa and Aaa corporate bond yields for
    June 2020. What does this difference represent?
    Baa rủi ro hơn
    b. Calculate the spread again, for the same month but one year prior, and compare the
    result to your answer to part (a). What do your answers say about how the risk
    premium has changed over the past year?

    c. Identify the month of highest and lowest spreads since the beginning of the year 2000.
    How do these spreads compare to the most current spread data available? Interpret
    the results.

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