Chapter 4 All Materials PDF

Chapter 4 All Materials PDF - ECON 330: Money and Banking...

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ECON 330: Money and Banking Fall 2007 Section 1: Tuesday and Thursday, 11:30AM-12:45PM, SMU 104 Section 2: Tuesday and Thursday, 5:00PM-6:15PM, SRO B Prof. J. Santos South Dakota State University Student Learning Objectives: Chapter 4: Understanding Interest Rates [1] De&ne the concept of present value. [2] Specify the formula for the present value of a future lump sum payment: PV Lump sum = FV (1+ i ) n [3] Specify the formula for the present value of an annuity: Annuity = C i & [1 ± 1 (1+ i ) n ] [4] Specify the formula for the present value of a coupon bond: Bond = C i & [1 ± 1 (1+ i ) n ] + (1+ i ) n [5] Specify the formula for the present value of a consol bond, or perpetuity: Consol = C i [6] Describe the payment structures associated with four types of credit instruments: simple loans, &xed-payment loans (annuities and perpetuities), coupon bonds and discount bonds. [7] Provide and identify examples of the four types of credit instruments. [8] De&ne, in the context of present value calculus, the concept of a yield to maturity. [9] Compute the yield to maturity on a simple loan, a discount bond and a consol. [10] Compute, for any given yield-to-maturity, the prices of a future lump-sum payment, an annuity, a zero-coupon bond, a coupon bond, and a consol. [11] Specify the formula for the current yield of a coupon bond:
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i Current yield = C P Bond [12] Identify the conditions under which the current yield is a reasonable approximation of the yield to maturity. [13] Specify the formula for the yield on a discount basis: i Discount yield = FV & P Bond & 360 days to maturity [14] Specify the formula for the return on a bond held from time t to t + 1 : RET t +1 ;t = P t +1 & P t P t + C P t [15] Distinguish between a bond&s yield to maturity and its one-period rate of return. [16] De±ne the term interest rate risk. [17] Discuss how the volatility of prices and returns for long-term bonds di/er from that of short-term bonds. [18] Distinguish between real and nominal interest rates. 2
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Department of Economics South Dakota State University Chapter 4: Understanding Interest Rates Econ 330: Money and Banking Fall 2007 Prof. Joseph Santos This outline draws from Frederic Mishkin’s Money, Banking and Financial Markets (2007) and, as such, contains copy written material. Please do not quote without proper citation.
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Department of Economics South Dakota State University [1] Measuring Interest Rates The concept of present value (or present discounted value) is based on the notion that a dollar paid to you one year from now is less valuable to you than a dollar paid to you yesterday. This notion is true because you can deposit a dollar in a savings account that earns interest and have more than a dollar in one year. The formula for the present value of a lump sum payable in n periods, when the simple interest rate is i, is: The present value of a series of identical $C payments that are paid for n periods, is called the present value of an annuity. The formula for the present value of an annuity, when the simple interest rate is i, is: This outline draws from Frederic Mishkin’s Money, Banking and Financial Markets (2007) and, as such, contains copy written material.
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This note was uploaded on 04/09/2008 for the course ECON 330 taught by Professor Santos during the Spring '08 term at SD State.

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Chapter 4 All Materials PDF - ECON 330: Money and Banking...

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