Charlee_CH_3 - FIN MKTS: Chapter 3 I. Measuring Interest...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
FIN MKTS: Chapter 3 I. Measuring Interest Rates a. Present Value : dollar of cash paid to you one year from now is less valuable than a dollar paid today. i. Simple Loan: principal + interest payment; interest rate = int. pmt/amt. of loan ii. Discounting the future: process of calculating today’s value of dollars received in the future iii. PV= CF/ (1+i) n iv. *PV is important because it allows us to figure out today’s value of a credit market instrument at a given simple interest rate (i) by adding up the PV of all the future CFs received b. 4 Types of Credit Market Instruments : timing of cash flows i. Simple Loan – money market instruments; commercial loans to businesses 1. *paid at maturity ii. Fixed Payment Loan (full amortized loan) – borrowed funds repaid by making the same payment every period consisting of part principal and interest for a set number of years; mortgage 1. * interest payments iii. Coupon Bond – pays bond owner a fixed interest payment (coupon payment) every year until the maturity date when a specified final amount is repaid (face/par value) 1. *interest payments iv. Discount Bond (zero-coupon) – bought at price that is below face value and face value is repaid at the maturity date; no interest payments 1. *paid at maturity c. Yield to Maturity : interest rate that equates the present value of cash flows received from a debt instrument with its value today (*most accurate measure of interest rates) i. Simple Loan: * simple interest rate (int. pmt./amt of loan) = YTM; i=YTM ii. Fixed-Payment Loan: sum of the present value of all cash flows; YTM=i 1. LV=(FP/(1+i)) + (FP/(1+i) 2 ) + (FP/(1+i) 3 )… (*calc: n/PV/FV/i) iii. Coupon Bond: sum of the PV of all coupon payments plus the PV of the final payment of the face value of the bond
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 02/21/2011 for the course FIN 3403 taught by Professor Duong during the Spring '08 term at The University of Oklahoma.

Page1 / 2

Charlee_CH_3 - FIN MKTS: Chapter 3 I. Measuring Interest...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online