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Social Science
Economics
Finance
Ch. 4 Understanding Interest Rates
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Terms in this set (23)
The most accurate measure of interest rates
Yield to maturity
Present Value
Today's value of a payment to be received in the future when the interest rate is i.
Simple Loan
A credit market instrument providing the borrower with an amount of funds that must be repaid to the lender at the maturity date along with an additional payment (interest).
Discounting the future
The process of calculating today's value of dollars received in the future.
Calculating the present value
PV=CF/(1+i)^n
What are the four types of credit market instruments
1. Simple loan
2. Fixed-payment loan
3. Coupon bond
4. Discount bond
Fixed-payment loan
The lender provides the borrower with an amount of funds, which must be repaid by making the same payment every period consisting of part of the principal and interest for a set number of years
Coupon bond
Pays the owner of the bond a fixed interest payment (coupon payment) every year until the maturity date when a specified final amount (face value or par value) is repaid. EX: U.S. Treasury bonds and notes and corporate bonds
Coupon rate
The dollar amount of the yearly coupon payment expressed as a percentage of the face value of the bond.
Discount bond (zero-coupon bond)
Is bought at a price below its face value (at a discount) and the face value is repaid at the maturity date (does not make any interest payments) just pays off the face value EX: U.S. Treasury bills, U.S. savings bonds, and long-term zero-coupon bonds
Yield to maturity
The interest rate that equates the present value of cash flow payments received from a debt instrument with its value today
Concerning simple loans the simple interest rate equals?
The yield to maturity
Consol or perpetuity bond
IS a perpetual bond with no maturity date and no repayment of principal that makes fixed coupon payments of $C forever.
Bond prices and interest rates are?
Negatively related!!!!
Yield on a discount basis
The measure of interest rates by which dealers in bill markets quote the interest rate on U.S. Treasury bills
Yield on a discount basis
Understates the more accurate measure of the interest rate, the yield to maturity; and the longer the maturity of the discount bond the greater this understatement becomes
Basis point
one one hundredth of a percentage point
Yield on a discount basis
The measure of interest rates by which dealers in bill markets quote the interest rate on U.S. Treasury bills
Rate of return (return)
The payments to the owner of a security plus the change in the security's value, expressed as a fraction of its purchase price
Rate of capital gain
Change in the bond's price relative to the initial purchase price.
Nominal Interest rate
The interest rate that is not adjusted for inflation
Real interest rate
The interest rate that is adjusted by subtracting expected changes in the price level so that it more accurately reflects the true cost of borrowing
Indexed bonds
Interest and principal payments are adjusted for changes in the price level
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