Financial Markets

Financial Markets - June 22, 2009 INTEREST RATES JUNE 22 nd...

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Unformatted text preview: June 22, 2009 INTEREST RATES JUNE 22 nd , 2009 Lauren Heller Econ 423, Financial Markets The Plan for Today Different Types of Credit Instruments Yield to Maturity Real vs. Nominal Interest Rates Interest Rates vs. Returns Risks facing bond holders Recall from last time Simple Loan Principal and an interest payment is paid at maturity Fixed-Payment Loan Equal monthly payments for a fixed number of years Coupon Bond Fixed yearly interest payment until maturity Specific amount repaid at maturity Discount or Zero-coupon Bond Purchased at a price below face value, and face value is repaid at maturity Recall from last time Simple Loan Principal and an interest payment is paid at maturity Simple Loan Interest Rate Calculation i = Interest Payment / Principal Simple Present Value n i CF PV ) 1 ( June 22, 2009 Yield to Maturity The yield to maturity of a loan is the interest rate that equates the value of the loan today with the present value of all future payments. Simple loans Yield to maturity = Simple interest rate Why? Fixed Payment Loans The lender borrows a fixed amount of funds which must be repaid to the borrower in fixed installments. Payments include principal and interest Examples? Auto Loans Mortgages Other consumer loans Fixed Payment Loans: An Example To celebrate your graduation from UNC, you decide to buy a new Prius from Mark Jacobson Toyota. The Prius retails for $23,132 At a 6% interest rate, what would your yearly payment be in order to pay off the loan in 5 years? Fixed Payment Loans: An Example To celebrate your graduation from UNC, you decide to buy a new Prius from Mark Jacobson Toyota. The Prius retails for $23,132 At a 6% interest rate, what would your yearly payment be in order to pay off the loan in 5 years? In this case: n i FP i FP i FP i FP LV 1 ... 1 1 1 3 2 5 4 3 2 06 . 1 06 . 1 06 . 1 06 . 1 06 . 1 132 , 23 $ FP FP FP FP FP June 22, 2009 Fixed Payment Loans: An Example At a 6% interest rate, what would your yearly payment be in order to pay off the loan in 5 years? In this case: FP = $5,491.45/year How much would you pay in total over the course of 5 years? Total Payments = $5,491.45 * 5 = $27,457.30 5 4 3 2 06 . 1 06 . 1 06 . 1 06 . 1 06 . 1 132 , 23 $ FP FP FP FP FP Pays the owner a fixed amount, or coupon payment , every year until the maturity date....
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Financial Markets - June 22, 2009 INTEREST RATES JUNE 22 nd...

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