Textbook Notes (367,931)
Canada (161,511)
ECON 302 (16)
Tom Velk (16)

Risk and Term Structure of Interest Rates - Mishkin

5 Pages
Unlock Document

Economics (Arts)
ECON 302
Tom Velk

THE RISK AND TERM STRUCTURE OF INTEREST RATES Risk Structure of Interest Rates What determines its interest rate y Default Risk o One aspect of a bond that influences the interest rate is the risk of defaultThis occurs when the issuer of a bond is unable or unwilling to make interest payments when promisedThe issuer could also not pay off the face value when the bond matures o Could have to corporations suffering big losses are likely to suspend payments on bondsTherefore their default risk would be quite high o Some bonds like sovereign bonds such as US Treasury bonds have almost no risk because they can always raise taxes to pay them offThese are called defaultfree bonds o The spread between the interest rates of bonds with default risk and the defaultfree bonds is called the risk premiumIndicates how much more people much earn in order to be willing to hold the risky bond o This can be understood by comparing default free US Treasuries and defaultrisk corporate bondso Assume here that initially both bonds are have the same default riskThe theory of asset demand states that if the expected return of a default risk bond decreases relative to the default free bond then its demand will fall
More Less

Related notes for ECON 302

Log In


Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.