Title: Theories Regarding Risk Rates: Structure, Factors That Influence Fixes Income Financial Investments
Abstract: (ProQuest: ... denotes formulae omitted.)1. IntroductionLong-term fixed income financial investments pose an interest rate risk that is higher in comparison with short-term securities rate. The duration of owning securities which have an equal maturity is different; thus, because the final value of securities is fixed, this value cannot be affected by interest rate variations. The return for owning such securities is equal with the actuarial rate calculated at its acquisition price.Buying high rate bonds is the only important choice for a good placement. Actually, everything depends on the interest rate calculated during the period of owning the bonds. The correct measurement of the income for owning bonds during a certain period represents their return, i.e. the return rate. Return is the sum of payments made during the owning period and it is a capital income that finally is gained (including by reimbursement) and it is calculated in relation to the initial price.Return results from owning bonds and it can be different from their interest rate. Return results after a placement is made and it is calculated in relation to the evolution of the interest actuarial rate, which may amount at the initial level of an owned asset until this asset reaches its maturity.2. Literature reviewThe rate structure expressed as an interest rate risk. This rate structure is explained in relation to three factors:(a) Non-payment risk (default risk)Non-payment risk (or default risk) is one of the characteristics that are specific to bonds which are influenced by the interest rate; in other words, the bond issuer is unable to pay interests or to reimburse the main bond owner.In general it is considered that Treasury bonds do not have a nonpayment risk in comparison with the ones issued by enterprises because governments can increase charges for debt payment or they can issue currency for paying debts. These bonds are known as riskless bonds. Similarly, in reach countries State debts are considered risky.The difference between the interest rate of risky bonds and riskless bonds is known as premium risk. It represents the additional rate that the owner of a bond gets and it poses a nonpayment risk for accepting the owning of more riskless bonds.The analysis of supply and demand existing on bonds market allows us to explain why a bond that poses a nonpayment risk still pays a positive risk premium and why this premium increases alongside with nonpayment risk.For evaluating the effect of non-payment risk on the interest rate, we have elaborated the charts of supply and demand for riskless bonds issued by Treasury and for the private bonds issued by an enterprise - see picture 1. We presume that private bonds have the same risk as the ones issued by the Treasury. Their price and their interest rate are initially equal ( P^sup C^^sub 1^ = P^sup T^^sub 1^ and i^sup C^^sub 1^ = i^sup T^^sub 1^) naturally if the risk premium of private bonds (i^sup C^^sub 1^ - i^sup T^^sub 1^) is null.An increase of the nonpayment risk for private bonds modifies the demand curve for these bonds, named D^sub 1^^sup c^ and D^sub 2^^sup c^ . Simultaneously, it modifies the demand curve for Treasury bonds, named D^sub 1^^sup T^ and D^sub 2^^sup T^. The balance prize (on the left axis) for private bonds named P^sub 1^^sup c^ and P^sub 2^^sup c^ and the interest rate for these bonds, named i^sub 1^^sup c^ and i^sub 2^^sup c^ (on the vertical axis). On the Treasury bonds market one can find the balance price P^sub 1^^sup T^ and P^sub 2^^sup T^ and the interest rate i^sub 1^^sup T^ and i^sub 2^^sup T^. The difference between i2T and i2c identifies the risk premium that is specific to private bonds.If nonpayment is more likely to appear, for example because the enterprise suffers losses, then the nonpayment risk is increased and this reduces the anticipated return of the bonds. …
Publication Year: 2016
Publication Date: 2016-07-01
Language: en
Type: article
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