presentation_2-2_marked - Also called the “yield to...

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Measuring interest rates Econ 230 Financial Markets and Institutions Prof. Cahill Fall 2009
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What is an “interest rate”? Amount paid to lender above original loan or investment Expressed as a percentage of the original loan (or investment) Divided evenly into each year of loan Example: 10% interest rate on a 5 year loan At the end of 5 years, the borrower would have paid back 10% of original loan amount each of 5 years.
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What is an “interest rate”? Usually, “interest rate” refers to the rate expected to be paid over the life of the loan (r)
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Unformatted text preview: Also called the “yield to maturity” (y) Adjusts for the timing of interest and principal payments “cash flows” (CF) Usually, “rate of return” refers to the interest actually received by the lender for a period of time (e.g. when asset was owned) May differ from “yield to maturity” if something happens after the asset is bought. The “discount rate” refers to the interest rate used to prove an asset to take into account risk, etc. (r) Is the same as the “interest rate” and should equal the yield to maturity...
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presentation_2-2_marked - Also called the “yield to...

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