Слайд 2FINANCIAL MARKETS AND
INTEREST RATES
![FINANCIAL MARKETS AND INTEREST RATES](/_ipx/f_webp&q_80&fit_contain&s_1440x1080/imagesDir/jpg/374822/slide-1.jpg)
Слайд 3Market Players
An investor / lender is an individual, company, government, or any
![Market Players An investor / lender is an individual, company, government, or](/_ipx/f_webp&q_80&fit_contain&s_1440x1080/imagesDir/jpg/374822/slide-2.jpg)
entity that owns more funds than it can use.
An issuer / borrower is an entity that has a need for capital.
Brokers and dealers are financial intermediaries, who purchase securities from issuers and sell them to investors
Слайд 4Securities
Debt security or bond – promises periodic payments of interest and/or principal
![Securities Debt security or bond – promises periodic payments of interest and/or](/_ipx/f_webp&q_80&fit_contain&s_1440x1080/imagesDir/jpg/374822/slide-3.jpg)
from a claim on the issuer's earnings
Equity or stock – promises a share in the ownership and profits of the issuer
Слайд 5Types of Financial Markets
Money markets trade short-term, marketable, liquid, low-risk debt securities
![Types of Financial Markets Money markets trade short-term, marketable, liquid, low-risk debt](/_ipx/f_webp&q_80&fit_contain&s_1440x1080/imagesDir/jpg/374822/slide-4.jpg)
- "cash equivalents“
Capital markets trade in longer-term, more risky securities:
bond (or debt) markets,
equity markets,
derivative markets
Слайд 6INTEREST RATES
The stated or offered rate of
interest (r) reflects three factors:
Pure
![INTEREST RATES The stated or offered rate of interest (r) reflects three](/_ipx/f_webp&q_80&fit_contain&s_1440x1080/imagesDir/jpg/374822/slide-5.jpg)
rate of interest (r*)
Premium that reflects expected inflation (IP)
Premium for risk (RP)
r = r* + IP + RP
Слайд 7Pure Interest Rate
the rate for a risk-free security when no inflation is
![Pure Interest Rate the rate for a risk-free security when no inflation](/_ipx/f_webp&q_80&fit_contain&s_1440x1080/imagesDir/jpg/374822/slide-6.jpg)
expected
constantly changes over time, depending on economic conditions
Слайд 8Inflation
Investors build in an inflation premium to compensate for this loss of
![Inflation Investors build in an inflation premium to compensate for this loss](/_ipx/f_webp&q_80&fit_contain&s_1440x1080/imagesDir/jpg/374822/slide-7.jpg)
value
the inflation premium is not constant; it is always changing based on investors' expectations of the future level of inflation
Слайд 9Risk
Counterparty (default) risk is the chance that the borrower will not be
![Risk Counterparty (default) risk is the chance that the borrower will not](/_ipx/f_webp&q_80&fit_contain&s_1440x1080/imagesDir/jpg/374822/slide-8.jpg)
able to pay the interest or pay off the principal of a loan.
Ratings companies identify and classify the creditworthiness of corporations and governments to determine how large the risk premium should be (AAA – CCC)
Слайд 10Risk
Liquidity risk – possible losses if there is no opportunity to buy
![Risk Liquidity risk – possible losses if there is no opportunity to](/_ipx/f_webp&q_80&fit_contain&s_1440x1080/imagesDir/jpg/374822/slide-9.jpg)
or to sell assets at the proposed volume for the proposed price due to bad market conditions
Слайд 11Risk
Interest rate risk - possible changes of asset value due to changes
![Risk Interest rate risk - possible changes of asset value due to](/_ipx/f_webp&q_80&fit_contain&s_1440x1080/imagesDir/jpg/374822/slide-10.jpg)
of the interest rate:
As interest rates increase, bond prices decrease.
As interest rates decrease, bond prices increase.
Слайд 12Risk
Currency risk – possible changes of the assets value due to changes
![Risk Currency risk – possible changes of the assets value due to](/_ipx/f_webp&q_80&fit_contain&s_1440x1080/imagesDir/jpg/374822/slide-11.jpg)
of the currency exchange rate.
Operational risk – possible losses due to possible technical mistakes.
Business-event risk – possible losses due to force-mageure events, changes in legislation, etc.
Слайд 13Normal Yield Curve Theories
upward sloping yield curve is considered normal:
expectations theory,
the
![Normal Yield Curve Theories upward sloping yield curve is considered normal: expectations](/_ipx/f_webp&q_80&fit_contain&s_1440x1080/imagesDir/jpg/374822/slide-12.jpg)
market segmentation theory,
the liquidity preference theory
Слайд 14Expectations Theory
The yield curve reflects lenders' and borrowers' expectations of inflation
Changes in
![Expectations Theory The yield curve reflects lenders' and borrowers' expectations of inflation](/_ipx/f_webp&q_80&fit_contain&s_1440x1080/imagesDir/jpg/374822/slide-13.jpg)
these expectations cause changes in the shape of the yield curve
Слайд 15Market Segmentation Theory
The slope of the yield curve depends on supply /
![Market Segmentation Theory The slope of the yield curve depends on supply](/_ipx/f_webp&q_80&fit_contain&s_1440x1080/imagesDir/jpg/374822/slide-14.jpg)
demand conditions in the short-term and long-term markets
An upward sloping curve results from a large supply of funds in the short-term market relative to demand and a shortage of long-term funds.
A downward sloping curve indicates strong demand in the short-term market relative to the long-term market
Слайд 16Liquidity Preference Theory
long-term securities often yield more than short-term securities
Investors generally prefer
![Liquidity Preference Theory long-term securities often yield more than short-term securities Investors](/_ipx/f_webp&q_80&fit_contain&s_1440x1080/imagesDir/jpg/374822/slide-15.jpg)
short-term securities, which are more liquid and less expensive to buy and sell. Investors require higher yield on long-term instruments to compensate for the higher cost
Слайд 17Liquidity Preference Theory
Borrowers dislike short-term debt because it exposes them to the
![Liquidity Preference Theory Borrowers dislike short-term debt because it exposes them to](/_ipx/f_webp&q_80&fit_contain&s_1440x1080/imagesDir/jpg/374822/slide-16.jpg)
risk of having to roll over the debt or raise new principal under adverse conditions (such as a rise in rates). Borrowers will pay a higher rate for long-term debt than for short-term debt, all other factors being held constant.