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Econ310_Notes20100916

Econ310_Notes20100916 - I nterest Rates 004 Equations PV =...

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Interest Rates (9/16/2010) Econ 310- 004 Equations PV = FV/(1 + i) n simple loan PV = FP/(1 + i) 1 + FP/(1 + i) 2 + FP/(1 + i) 3 + … + FP/(1 + i) n fixed- payment loan i = (F - P)/P discount bond PV = FV/(1 + i) n + C/(1 + i) 1 + C/(1 + i) 2 + … + C/(1 + i) n coupon bond o FV/(1 + i) n PDV of bond selling price o C/(1 + i) 1 + C/(1 + i) 2 + … + C/(1 + i) n PDV of coupon payments P C = C/i C consol R = i C + g rate of return i = r + π e fisher equation Definitions interest rate – the price of time (not the price of money); price paid for rental of funds yield to maturity – interest rate that equates the present value of payments received from a credit market instrument with its value today present discounted value (PDV) – today’s value of future payment cash flows – cash payments to holder of a security bond – debt security with periodic payments for a specified period of time simple loan – lender provides funds to borrower; at the maturity date the principal plus additional interest is due fixed-payment loan

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