BUSI 3410U Lecture Notes - Lecture 6: Swedish National Bank, Risk Premium, Liquidity Premium
Document Summary
Four types of credit market instruments si(cid:373)ple loa(cid:374), fi(cid:454)ed pa(cid:455)(cid:373)e(cid:374)t loa(cid:374), Discount bond: one year bond: bond without coupons, ytm equals the increase in price over the year divided by the initial price, yield on a discount basis idb = (f p) Nov 1998, interest rates on japanese 6-months t-bills = - 0. 004% with investors paying more for the bills. Weakness of jap economy and a negative inflation rate drove interest rates to low levels; 2 factors cannot explain negative rates. Riksbank fixed interest rates at -0. 25% on certain deposits kept by the commercial banks at the central bank. Banks are usually paid interest on these deposits. Risk that a (cid:271)o(cid:374)d"s p(cid:396)i(cid:272)e (cid:449)ill (cid:272)ha(cid:374)ge (cid:271)e(cid:272)ause i(cid:374)te(cid:396)est (cid:396)ates (cid:272)ha(cid:374)ge. Volatile refers to the % change of price. Prices for lt bonds are more volatile than those for st bonds. Prices for low-coupon bonds are more volatile than those for high-coupon bonds.
