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
•
fixedpayment loan
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
This is the end of the preview.
Sign up
to
access the rest of the document.
 Fall '08
 Staff
 Interest Rates, Bond Coupon Bond

Click to edit the document details