ECO349H5 Lecture Notes - Lecture 5: Credit Risk, Fitch Ratings, Liquidity Premium
Document Summary
Lecture #6 - risk and term structure of interest rates. For a fixed maturity (and coupon), the interest rate on a vanilla bond varies by issuer: The bonds issued by the goc (and its agencies), the provinces (and their agencies), as well as different corporations all provide their own yield to maturity. Default risk - probability that the issuer will not make interest payments or fv payment. Govt of canada is basically default risk free, provincial bonds have very little risk, and many corporations have and will default on debt. Risk premium - spread between interest on bonds with default risk and interest on government bonds with same maturity. Tax considerations relevant in the us, but not canada. Rk:victory bonds issued in 1918 (just after introduction of income tax) to fund wwi were tax free. Credit rating agencies - assess and grade risk. Liquidity - ease and cost with which an asset can be converted into cash.
