ECON 3430 Lecture Notes - Lecture 6: Liquidity Premium, Dbrs, Income Tax

• School: York University
• Department: Economics
• Course: ECON 3430
• Professor: Brenda Spotton- Visano

Document Summary

The risk and term structure of interest rates. Learning objectives: identify and explain the three factors affecting the risk structure of interest rates, list and explain the three theories of why interest rates vary across different maturities. Bond yields differ (sometimes substantially) across bonds of similar maturity. Default risk: probability that the issuer of the bond is unable or unwilling to make interest payments or pay off the face value. Government of canada bonds are considered default-free (government can raise taxes or print money to repay) Risk premium: the spread between the interest rates on bonds with default risk and the interest rates on (same maturity) canada bonds. Response to an increase in default risk on corporate bonds. Bo(cid:374)d rati(cid:374)gs (cid:271)(cid:455) dbrs, mood(cid:455)"s, sta(cid:374)da(cid:396)d a(cid:374)d poo(cid:396)"s, a(cid:374)d fit(cid:272)h. Liquidity: the ease with which an asset can be converted into cash cost of selling a bond number of buyers/sellers in a bond market.