chapter 12 Flashcards
Risk structure of interest rates: Bonds with the same term to maturity have …. The relationship among these …s is called t…
A…. One attribute of a bond that influences its i… is its … . …occurs when the issuer of the bond ….
a. …: …. E.g. …
b. …: The spread between … is called the …
Risk structure of interest rates: Bonds with the same term to maturity have different interest rates. The relationship among these interest rates is called the risk structure of interest rates
A. Default risk: One attribute of a bond that influences its interest rate is its risk of default. Default risk occurs when the issuer of the bond is unable or unwilling to make interest payments when promised or to pay off the face value when the bond matures
a. Default-free bonds: bonds with no default risk. E.g. Canadian government bonds (because the federal government can always increase taxes or print money to pay off its obligations).
b. Risk premium: The spread between interest rates on bonds with default risk and interest rates on default-free bonds, both of the same maturity, is called the risk premium.
