Econ Money and Banking Ch. 4

14 terms

Present Value

the value today of something to be received in the future. A dollar paid to you 1 year from now is less valuable to you then a dollar paid to you today.

a period of time

Par (face) Value

value of a bond at its maturity; what the issuer promises to pay the bondholder when bond matures

Coupon Rate

the yearly coupon payment on a bond expressed as a percentage of the bond's par value

Coupon Payment

an interest payment on a bond

Yield to Maturity

the interest rate that equates the present value of cash flow payments received from a debt instrument with its value today

Relationship between Yield and Price

1. When hte coupon bond is priced at its face value, the yield to maturity equals the coupon rate.
2. The price of a coupon bond and the yield to maturity are negatively related; as the yield to maturity rises, the price of the bond falls, and vice-versa.
3. The yield to maturity is greater than the coupon rate when the bond price is below face value.

Consol/ Perpetuity

a bond with no maturity date and no repayment of principal that makes fixed coupon payments of \$C forever

Current Yeild

An approximation of the yield to maturity that equals the yearly coupon payment divided by the price of the coupon bond.

Rate of Return

The payment to the owner of a security plus the change in the security's value, expressed as a fraction of its purchase price.

Interest Rate Risk

the possible reduction in returns that is associated with changes in interest rates

Nominal interest rate

current or market interest rate

Real interest rate

interest rate adjusted for expected changes in the price level

Fisher equation

When the interest rate is low there are greater incentives to borrow and fewer incentives to lend
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