note3spring2008

note3spring2008 - Chapter 6 pp 120 top130(skip 128-129 and...

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Chapter 6, pp. 120- top130 (skip 128-129) and p. 142-143 Bond prices: Four kinds of bonds: zero-coupon, fixed payment, coupon and consols. Zero-coupon. Also called discount bonds because they sell at a discount to face. Price of $100 face value of a zero-coupon bond = $100/(1 + i) n (Watch the time period. You must have the time periods and interest rates in consistent units.) (Note: the U.S. has bills (1 year and under); notes (5 and 10-year) and bonds (30 year; not issued for a while).) Fixed-Payment loans. (Do you ever issue a bond?) Mortgages and car loans are amortized such that there is no final principal payment. In each payment is part of the principal. Coupon bond. Differs from the fixed-payment loan in that the principal is paid at the end. Consol or Perpetuity. Pays interest forever. Issued by some governments. It’s price is equal to the present value of all its interest payments. The formula is simple and you can see the derivation in the footnote on p. 124.
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