Question

What effect does increasing credit risk have on securities?

If I'm at the 35% tax bracket and a muni is paying 4%, what yield must I get on a taxable to compete?

What factors influence the shape of the yield curve? Can I use those factors to aid my investing?

Answer 1

1) The key risks of corporate bonds are default risk (also referred to as credit risk), interest rate risk, economic risk, liquidity risk and other significant risks including call and event risk. The higher default risk leads to speculative-grade bond issuers to pay higher interest rates that go hand-in-hand with the credit rating risk, which is part of the credit risk by extension. Credit-ratings, provided by rating agencies such as S&P and Moody's, are meant to capture and categorize credit risk.

Credit migration risk describes the risk of “the potential for direct loss due to internal/ external ratings downgrade or upgrade as well as the potential indirect losses that may arise from a credit migration event”, also referred to as credit-rating risk or downgrade risk.

2)	Given
	Tax Rate	35%
	Muni is paaying	4%
	Yield on taxable securities to compete	??
	Let's start
a	Net in Hand post tax (1-Tax rate) i.e (1 - 0.35)	0.65
b	Muni's paying %	4%
c	Taxable Yield (b/a)	6.15%

3) The yield curve's shape is affected by the demand and supply conditions for securities in various maturity markets. Expectations of interest rates, the desire for liquidity, and the desire by investors or borrowers for a specific maturity will influence the demand and supply conditions. The yield curve can be used to determine the market's expectations of future interest rates.

Can I use those factors?

Ans: Market participants can compare their own expectations to the market's expectations in order to determine their borrowing or investing decisions.