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20 download_doc-8.php - BUS-G 345 Lecture 2 1/18/2011...

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BUS-G 345 Lecture 2 1/18/2011 Understanding Interest Rates I. Types of IOUs (each has a return for the lender and a cost (interest) to the borrower) a. Simple loan i. Bank is lending money to an individual who borrows it ii. Borrower will pay principal (amount of loan) + amount of interest b. Discount bond i. Borrower wants to borrower money and issues a discount bond which is purchased by the save ii. Borrower must pay back one large sum at the end of the period of the bond 1. Very similar to the simple loan a. If you aren’t a well-established company nobody will purchase a discount bond from you c. Coupon bond i. Saver buys a bond from a corp (borrower). The borrower will pay a coupon payment periodically and at the last payment period will pay the coupon payment + the face value (principal) d. Fixed-fixed payment loan i. Borrower pays same amount of money each period. Each payment is a combination of principal + interest II. Present value (don’t need to know how to calculate yield to maturity) a. A dollar that you receive in the future is less valuable than a dollar you receive today i. Because a dollar you get today can be invested b. The value today of a future payment i. Need to take into consideration the interest rate and the period which you will receive the payment(s)
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III. Yield to maturity (AKA interest rate in the bond market)
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This note was uploaded on 04/18/2011 for the course BUS 202 taught by Professor Kreft during the Winter '09 term at Indiana.

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20 download_doc-8.php - BUS-G 345 Lecture 2 1/18/2011...

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