ch4.docx - Present value of an asset = cash flow PV=CF/1 i...

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Present value of an asset = cash flow PV=CF/1+i + CF2/(1+i)^2……etc etc CF=cash flow, i= interest rate Perpetual bond: No maturity date Pays interest Price of bond= Coupon rate/Interest rate Discount bond: Has a maturity date Pays no interest Return comes from capital gain from the price of asset increasing Price of bond= Face Value/1+Interest rate^n Pb=1000/(1+.03)^10=744.09 Coupon bond: Pb=C/1+I + C/(1+i)^2 etc Has a maturity date Pays in interest Discount of future value= expected cash flows
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Unformatted text preview: Rates on bonds: Coupon rate= $ amount of interest payment/future value, C/FV, $60/$1000= .06 or 6% Current yield= coupon payment/price of bond, C/Pb, $60/$973= .0614 or 6.17% Yield to maturity->interest rate. Captures both current yield and capital gain or loss on bond->total return if bond is held to maturity. RET= coupon+(Ending price-Beginning price)/beginning price Fisher Equation= I(nominal interest rate)= r(real rate)+pi^e(expected inflation) or 2%...
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