Financial Markets and Institutions (2-downloads)

Maturity and the Volatility of Bond Returns: Interest-Rate Risk

53

Reinvestment Risk

54

■ MINI-CASE

Helping Investors Select Desired Interest-Rate Risk

54

Summary

55

■ THE PRACTICING MANAGER

Calculating Duration to Measure 

Interest-Rate Risk

55

Calculating Duration 

56

Duration and Interest-Rate Risk

60

Summary

61

Key Terms

62

Questions

62

---

Contents in Detail 

xi

Quantitative Problems

62

Web Exercises

63

Chapter 4 Why Do Interest Rates Change?

64

Preview

64

Determinants of Asset Demand

64

Wealth

65

Expected Returns

65

Risk

66

Liquidity

67

Summary

68

Supply and Demand in the Bond Market

68

Demand Curve

69

Supply Curve

69

Market Equilibrium

70

Supply-and-Demand Analysis

71

Changes in Equilibrium Interest Rates

72

Shifts in the Demand for Bonds

72

Shifts in the Supply of Bonds

75

■ CASE

Changes in the Interest Rate Due to Expected Inflation: The Fisher Effect 

78

■ CASE

Changes in the Interest Rate Due to a Business Cycle Expansion 

79

■ CASE

Explaining Low Japanese Interest Rates

81

■ CASE

Reading the 

Wall Street Journal “Credit Markets” Column

82

■ FOLLOWING THE FINANCIAL NEWS

The “Credit Markets” Column

83

■ THE PRACTICING MANAGER

Profiting from Interest-Rate Forecasts

84

■ FOLLOWING THE FINANCIAL NEWS

Forecasting Interest Rates

85

Summary

85

Key Terms

86

Questions

86

Quantitative Problems

87

Web Exercises

87

Web Appendices

88

Chapter 5 How Do Risk and Term Structure Affect Interest Rates?

89

Preview

89

Risk Structure of Interest Rates

89

Default Risk

90

■ CASE

The Subprime Collapse and the Baa-Treasury Spread

93

Liquidity

93

Income Tax Considerations

94

Summary

95

■ CASE

Effects of the Bush Tax Cut and Its Possible Repeal on Bond Interest Rates 96

Term Structure of Interest Rates

96

■ FOLLOWING THE FINANCIAL NEWS

Yield Curves

97

Expectations Theory

98

Market Segmentation Theory

102

Liquidity Premium Theory

103

---

xii

Contents in Detail

Evidence on the Term Structure

106

Summary

107

■ MINI-CASE

The Yield Curve as a Forecasting Tool for Inflation and 

the Business Cycle

108

■ CASE

Interpreting Yield Curves, 1980–2010

108

■ THE PRACTICING MANAGER

Using the Term Structure to Forecast 

Interest Rates

110

Summary

112

Key Terms

113

Questions

113

Quantitative Problems

114

Web Exercises

115

Chapter 6 Are Financial Markets Efficient?

116

Preview

116

The Efficient Market Hypothesis

117

Rationale Behind the Hypothesis

119

Stronger Version of the Efficient Market Hypothesis

120

Evidence on the Efficient Market Hypothesis

120

Evidence in Favor of Market Efficiency

120

■ MINI-CASE

An Exception That Proves the Rule: Ivan Boesky

122

■ CASE

Should Foreign Exchange Rates Follow a Random Walk?

124

Evidence Against Market Efficiency

124

Overview of the Evidence on the Efficient Market Hypothesis

126

■ THE PRACTICING MANAGER

Practical Guide to Investing in the Stock Market 127

How Valuable Are Published Reports by Investment Advisers?

127

■ MINI-CASE

Should You Hire an Ape as Your Investment Adviser?

127

Should You Be Skeptical of Hot Tips?

128

Do Stock Prices Always Rise When There Is Good News?

128

Efficient Markets Prescription for the Investor

129

■ CASE

What Do the Black Monday Crash of 1987 and the Tech Crash 

of 2000 Tell Us About the Efficient Market Hypothesis?

130

Behavioral Finance

131

Summary

132

Key Terms

132

Questions

132

Quantitative Problems

133

Web Exercises

133