Ch 03 outline student (1)

# Ch 03 outline student (1) - Chapter 3 What Do Interest...

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Chapter 3: What Do Interest Rates Mean and What Is Their Role in Valuation? Sections not covered: Calculating Duration Present Value Different debt instruments have very different streams of cash payments to the holder (known as ____cash flow_ ______ ), with very different timing. All else being equal, debt instruments are evaluated against one another based on the ___ amount ______ of each cash flow and the timing _______ of each cash flow. This evaluation, where the analysis of the amount and timing of a debt instrument’s cash flows lead to its _____ yeild to maturity __ or interest rate , is called present value analysis. The concept of ___ present value ____ is based on the idea that a dollar of cash flow paid to you one year from now is less valuable to you than a dollar paid to you today. This is true because you could invest the dollar in a savings account that earns interest and have more than a dollar in one year. The term present value (PV) can be extended to mean the PV of a single cash flow or the __ sum ___ of a sequence or group of cash flows. Present Value Applications There are four basic types of debt instruments which incorporate present value concepts: 1. _______ Simple Loan __ : a lump sum is repaid at the end of the loan term 2. _______ Fixed Payment Loan _____ : equal payments are made through the loan term (amortized) Installment Loans, such as auto loans and home mortgages are nearly always of the fixed-payment type. 3. _____Coupon Bond ____ : periodic payments of interest (coupon payment), usually with a face value of \$1000, and coupon payment every six months 4. __ Discount Bond _______ : sold at a discount to face value, with one lump payment of the face value at the end of the term Simple Loan Illustration: Loan Principal: the amount of funds the ____ Lender__ provides to the Borrower ___.

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