CH3 - Spring 2011

CH3 - Spring 2011 - SECURITY rr EX POST MEASURE OF INTEREST...

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INTEREST RATE COUPON RATE REQUIRED RATE OF RETURN (rrr) EXPECTED RATE OF RETURN (Err) REALIZED RATE OF RETURN (rr)
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COUPON RATE DETERMINES THE CASH FLOW THE BOND ISSUER PROMISES TO PAY GENERALLY CONSTANT OVER THE LIFE OF THE BOND
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REQUIRED RATE OF RETURN (rrr) INTEREST RATE USED TO FIND THE FAIR PRESENT VALUE (PV) OF A SECURITY INTEREST RATE AN INVESTOR SHOULD RECEIVE GIVEN THE RISKS OF A SECURITY rrr EX ANTE MEASURE OF INTEREST RATE (BASED ON FPV) SECURITY IS FAIRLY PRICED IF PV = MARKET PRICE
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EXPECTED RATE OF RETURN (Err) INTEREST RATE AN INVESTOR WOULD RECEIVE IF PROMISED CASH FLOWS ARE RECEIVED Err EX ANTE MEASURE OF INTEREST RATE (BASED ON MARKET PRICE)
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MARKET EFFICIENCY SPEED WITH WHICH PRICES ADJUST TO UNEXPECTED NEWS IF FINANCIAL MARKETS ARE EFFICIENT P = PV Err = rrrr
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REALIZED RATE OF RETURN (rr) INTEREST RATE EARNED ON A
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Unformatted text preview: SECURITY rr EX POST MEASURE OF INTEREST RATE (BASED ON MARKET PRICE) IMPACT OF INTEREST RATE INVERSE (NONLINEAR) RELATIONSHIP BETWEEN INTEREST RATES AND SECURITY VALUES AS INTEREST RATES , PRESENT VALUES OF BONDS (PV AND P) E SEE FIG 3-1 (p. 73) IMPACT OF MATURITY ON PULL-TO-PAR EFFECT BOND PRICES APPROACH FACE VALUE AS TIME TO MATURITY DECLINES AS MATURITY , PRICE SENSITIVITY (BUT AT A DECREASING RATE) PRICE SENSITIVITY CHANGE IN VALUE CAUSED BY A CHANGE IN INTEREST RATES IMPACT OF COUPON THE HIGHER THE COUPON RATE, THE HIGHER THE BONDS PRESENT VALUE FOR A GIVEN CHANGE IN INTEREST RATES THE HIGHER THE COUPON RATE, THE SMALLER THE PRICE CHANGE (PRICE DURATION WEIGHTED-AVERAGE TIME TO MATURITY TIME REQUIRED TO RECOVER INITIAL INVESTMENT CH22...
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CH3 - Spring 2011 - SECURITY rr EX POST MEASURE OF INTEREST...

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