3531Week9W11 - Week 9 Part I Interest Rates Our goal is to...

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Week 9 Part I Interest Rates Our goal is to discuss the many different interest rates that are commonly reported in the financial press. We will also: Find out how different interest rates are calculated and quoted Discuss theories of what determines interest rates. 1
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Interest Rate History 2
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Money Market Rates Prime rate - The basic interest rate on short-term loans that the largest commercial banks charge to their most creditworthy corporate customers. Bellwether rate - Interest rate that serves as a leader or as a leading indicator of future trends, e.g. inflation. Bank rate -Interest rate that the Bank of Canada offers to commercial banks for overnight reserve loans. 3
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Money Market Rates Call money rate - The interest rate brokerage firms pay for call money loans from banks. This rate is used as the basis for customer rates on margin loans. Commercial paper - Short-term, unsecured debt issued by the largest corporations. 4
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Money Market Rates Certificate of deposit (CD) - Large-denomination deposits of $100,000 or more at commercial banks for a specified term. Banker’s acceptance - A postdated check on which a bank has guaranteed payment. Commonly used to finance international trade transactions. 5
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Money Market Rates London Eurodollars - Certificates of deposit denominated in U.S. dollars at commercial banks in London. London Interbank Offered Rate (LIBOR) - Interest rate that international banks charge one another for overnight Eurodollar loans. Treasury bill (T-bill) - A short-term federal government debt instrument. 6
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Money Market Prices and Rates A Pure Discount Security is an interest-bearing asset: It makes a single payment of face value at maturity . It makes no payments before maturity . There are several different ways market participants quote interest rates. Banker’s Discount Basis Bond Equivalent Yields (BEY) Annual Percentage Rates (APR) Effective Annual Rates (EAR) 7
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The Bank Discount Basis The Bank Discount Basis is a method of quoting interest rates on money market instruments. It is commonly used for T- bills and banker’s acceptances. The formula is: Note that we use 360 days in a year in this money market formula. The term “discount yield” here simply refers to the quoted interest rate. 8 Yield Discount x 360 Maturity to Days 1 x Value Face Price Current
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Treasury Bill Prices Treasury Bill prices can be calculated using the formula: If the bond equivalent rate is given as 3.315% on a T-bill with 170 days to maturity and $1,000,000 face value, the price is 365 / 170 03315 . 0 1 000 , 000 , 1 $ 795 , 984 $ X 9 365 / ) ( 1 Pr Maturity to Days X Yield Equivalent Bond FaceValue ice Bill
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Rates and Yields on Fixed-Income Securities Fixed-income securities include long-term debt contracts from a wide variety of issuers: The Canadian government Real estate loans (mortgage debt) Corporations Provincial and municipal governments 10
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This note was uploaded on 05/01/2011 for the course ADMS 3531 taught by Professor Profp during the Winter '10 term at York University.

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3531Week9W11 - Week 9 Part I Interest Rates Our goal is to...

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