ECO 301 Lecture Notes - Lecture 8: Substitute Good, Tax Bracket, Yield Curve

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Chapter 6: risk and term structure of interest (i) rates. Bonds with the same maturity may have different interest rates. A firm might pay a higher ytm because they must compensate investors for taking on more risk of default than if they had gone with the safer firm. Ex. one firm has a credit rating of aaa and the other has bb the bb firm would pay a higher interest rate to compensate for the added risk. Government bonds have lower interest rates that corporate bonds. Government bonds from us treasury often have higher interest rates than state and local. Corporate aaa rated bonds offer lower rates that corporate baa bonds. Keep in mind that the higher yields are compensation for various negative characteristics. Bonds with the same maturity have different interest rates because of varying: default risk, liquidity, tax considerations. Most (cid:271)o(cid:374)ds are ta(cid:454)a(cid:271)le, (cid:271)ut so(cid:373)e are ta(cid:454) e(cid:454)e(cid:373)pt like (cid:373)u(cid:374)i"s.

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