1. Copyright © 2002 Pearson Education, Inc. Default Risk Default risk is measured relative to risk-free U.S. Treasury bonds. Default-risk premium = bond yield - yield on a comparable default-risk-free bond. The risk premium reflects in part the bond rating.

2. Copyright © 2002 Pearson Education, Inc. Slide 7-2 Table 7.1 Bond Ratings

3. Copyright © 2002 Pearson Education, Inc. Slide 7-3 Figure 7.2 Long-term and Short-term Yields in the U.S., 1960-2000

4. Copyright © 2002 Pearson Education, Inc. Slide 7-4 Other Factors Affecting Bond Yields Liquidity Information Costs Tax Treatment Tax – Free State & Municipal Bonds

5. Copyright © 2002 Pearson Education, Inc. Slide 7-5 Effect of Increased Tax on Interest Earnings

6. Copyright © 2002 Pearson Education, Inc. Slide 7-6 Table 7.2 Risk Structure of Interest Rates

7. Copyright © 2002 Pearson Education, Inc. Yield Curve Yield curve is a graph of U.S. Treasury debt instruments as a function of maturity. Yield curve generally slopes upward. Yields on Treasury securities of different maturities have typically moved together.

8. Copyright © 2002 Pearson Education, Inc. Slide 7-8 Theories of Term Structure

9. Copyright © 2002 Pearson Education, Inc. Slide 7-9 Figure 7.7 Interpreting the Yield Curve