notes 3 - 9-10-09

notes 3 - 9-10-09 - Measures of duration Macalay Duration -...

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9/10/2009 171A Midterm #1 - CH 1 - 4 - 3 month t-bill rate 0.10 - Some Long Term Government bond rate (30 years) 4.26 - Current inflation rate (CPI) -1.5 - GDP (US) – Level + Growth 13.84 trillion Consol: P = Coupon Value ($) / Interest rate Ex:1 P (20 yr bond Coupon rate = 5% 1000 Disct rate 6% P = $885.30 Expected Interest rate Reinvestment Risk Elasticity – How responsive is price to interest changes? Discount Bond – current price is below par value Zero Coupon Bond – no coupon Duration
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Unformatted text preview: Measures of duration Macalay Duration - Annual Percentage Rate (APR) Effective Annual Rate (EAR) CH4 Why do interest rates change?-Demand for bonds-Supply of bonds Bond prices and interest rates move in opposite directions 3 month t-bill in early 50s = 1% (nominal) 3 month t-bill in 1981 = 1.5% 3 month t-bill now = 0.2% Bonds Prices (vs. Loanable funds approach) Stocks vs. Flows Bonds focus on bond prices Loanable funds focus on interest rates...
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