Write an assessment in which you address the following problems/questions:
- Form a discussion on the possible determinants of market interest rates. For each determinant offer an explanation for when that determinant may tend to be either stronger or weaker and what is the driving force for that differential impact. For example, when would the default risk premium be stronger verse weaker and what seems to be the drivers to that stronger or weak impact?
- Present and explain the U.S. Treasury yield curve. Present the three main types of yield curves with regard to shape. Illustrate with numerical examples how future inflation impacts the yield curve.
- Describe the different types of debt securities. This should be a list of the various securities in each class along with relevant information that defines each security.
- Develop a valuation model for a corporate bond with a par value at maturity of $1,000, a maturity of 20 years, a coupon interest rate of 7%, and a yield to maturity of 4%. The coupons are assumed to be paid semi-annually. In your development and presentation, include a time line showing the relevant cash flows along with all of the steps that allow you to generate the value (price of the bond).
- Given the problem above, identify how the bond price will be expected to adjust across time as the bond approaches maturity. You should calculate the price after each 2-year period has passed – i.e., after year 2, year 4, year 6, year 8, year 10, year 12, year 14, year 16, year 18, and year 20. Graph the resulting movement in the price across time using the resulting values. Explain how this movement in the bond price across time is important for the investor.
Support your paper with at least three (3) resources. In addition to these specified resources, other appropriate scholarly resources, including older articles, may be included.
Your paper should demonstrate thoughtful consideration of the ideas and concepts that are presented in the course and provide new thoughts and insights relating directly to this topic. Your response should reflect scholarly writing and current APA standards
Length: 4-5 pages (not including title and reference pages)
Explanation & Answer
Running head: INTEREST RATES AND DEBT SECURITIES
Interest Rates and Debt Securities Assessment
Date of Submission
INTEREST RATES AND DEBT SECURITIES
Determinants of market interest rates
In a free market interest rates are basically determined by the availability of credit facilities from
the financial institutions. When more money is made available in the financial institutions for
borrowing, the interest rates in the economy are bound to go down. Thus, the market interest
rates are affected by the interaction between the supply and demand of credit. Financial
institutions acquire money to lend its customers by having customers who open accounts and
deposit money into it. When more customers deposit money in the bank, the interest rates of the
bank go down, as the supply of money available for loaning is high. This in turn reduces the
interest rates of the loans borrowed.
A customer can also reduce the supply of credit, when they defer in their repayment of loans
borrowed from banks. When a customer fails to honor the timely repayment of their credit card,
the interest for paying for the card increases. This also reduces the amount of money available to
lend to other customers, making the demand for credit greater than the supply. Due to this, the
interest rates of the loans may increase to meet the operating cost of the banks.
The interest rates are also affected by the rate of inflation in the market. Inflation refers to the
rate at which prices of goods and services increase generally in the market. When inflation rate is
high, the value for money in the economy goes down. This makes the financial institutions
increase interest rates to obtain the...
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