(BBA)CH4 Understanding Interest Rates

# (BBA)CH4 Understanding Interest Rates - Chapter Four...

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Chapter Four   Understanding Interest Rates

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Measuring Interest Rates (P.69) Different debt instruments have different streams of cash payments to the holders with different timing. We usually use present value to measure interest rate. Present Value is defined as the today value of a dollar paid to you one year from now.
Example of Simple Present Value (p.71) What is present value of \$250 to be paid in two year if interest rate is 15%? (Sol: \$189.04) n i CF Value esent ) 1 ( Pr + =

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Four Types of Credit Market Instruments (p.72) In terms of timing of their cash flow payments , there four basic types of credit market instruments. 1. A Simple Loan 2. A Fixed-Payment Loan 3. A Coupon Bond 4. A Discount Bond (Zero-coupon Bond)
Examples of Credit Market Instruments (p.72) 1. A Simple Loan (ex. Working Capital Loan) 2. A Fixed-Payment Loan (ex. Car Loan, Mortgage Loan) 3. A Coupon Bond (ex. 7-year T-Note, 30-year T-bond) 4. A Discount Bond (Also called Zero-Coupon Bond ) (ex. 3-month T-Bill)

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Yield to Maturity (p.72- 73) Yield to maturity is defined as interest rate that equates the present vale of cash flow payments
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## This note was uploaded on 11/07/2010 for the course BBA 4565 taught by Professor Chushunhe during the Spring '10 term at University of Macau.

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(BBA)CH4 Understanding Interest Rates - Chapter Four...

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