Homework End of problem exercises chapters 3 and 11. Additional problems will be posted on my website. Interest Rate Markets Broadly speaking interest rates are the rate at which one borrows money from a lender. If we have a borrower and a lender what are some factors that determine the level of interest rate? The level of interest rate for a specific borrower and lender depends on Who the borrower is – their credit worthiness and if the borrowing is collateralized how risky/liquid is the collateral What the borrower wants to do with the funds Who the lender is and how they raise the funds for investment How long does the borrower want the funds Go back to the example. These are examples of unsecured borrowing. There are many different types of borrowers here with different credit-worthiness as well as with different intentions for the funds. The borrowers have different choices for lender – why are they here rather than at a bank or a credit card company. What does this say about the borrower? In this instance we are the lenders. x On the website one finds that the maturity of the loans are 1, 3 and 5 years in maturity. The US treasury market is one of the largest in the world. It is segmented into three parts: Bring up Public Debt statement One term I will use without thinking is a basis point which is 0.01%. Marketable securities Bills – short term <1 year 1.6tn Notes – medium term 2-10 years 6.8tn Bonds – long term >10 years 1.1tn TIPS – inflation linked securities 5, 10 and 30yr – 0.8tn Let’s first look at interest rates over time. Here’s a 1 year chart of the 1M treasury bill rate. Note the difference between this and the 5 year chart. With one year of
Homework End of problem exercises chapters 3 and 11. Additional problems will be posted on my website. Interest Rate Markets Broadly speaking interest rates are the rate at which one borrows money from a lender. If we have a borrower and a lender what are some factors that determine the level of interest rate? The level of interest rate for a specific borrower and lender depends on Who the borrower is – their credit worthiness and if the borrowing is collateralized how risky/liquid is the collateral What the borrower wants to do with the funds Who the lender is and how they raise the funds for investment How long does the borrower want the funds Go back to the example. These are examples of unsecured borrowing. There are many different types of borrowers here with different credit-worthiness as well as with different intentions for the funds. The borrowers have different choices for lender – why are they here rather than at a bank or a credit card company. What does this say about the borrower? In this instance we are the lenders. x On the website one finds that the maturity of the loans are 1, 3 and 5 years in maturity. The US treasury market is one of the largest in the world. It is segmented into three parts: Bring up Public Debt statement One term I will use without thinking is a basis point which is 0.01%. Marketable securities Bills – short term <1 year 1.6tn Notes – medium term 2-10 years 6.8tn Bonds – long term >10 years 1.1tn TIPS – inflation linked securities 5, 10 and 30yr – 0.8tn Let’s first look at interest rates over time. Here’s a 1 year chart of the 1M treasury bill rate. Note the difference between this and the 5 year chart. With one year of