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Charlee_CH_3

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

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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

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

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