FIN355_Chapter9

FIN355_Chapter9 - Chapter McGraw-Hill/Irwin 9 Interest...

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Unformatted text preview: Chapter McGraw-Hill/Irwin 9 Interest Rates Learning Objectives It will be worth your time to increase your rate of interest in these topics: 1. Money market prices and rates. 2. Rates and yields on fixed-income securities. 3. Treasury STRIPS and the term structure of interest rates. 4. Nominal versus real interest rates. 9-2 9-3 Interest Rates Our goal in this chapter 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, and Discuss theories of what determines interest rates. 9-4 U.S. Interest Rate History, 1800-2009 9-5 Money Market Interest Rates 9-6 Money Market Rates, I. Prime rate- The basic interest rate on short-term loans that the largest commercial banks charge to their most creditworthy corporate customers. Federal funds rate- Interest rate that banks charge each other for overnight loans of $1 million or more. Discount rate- The interest rate that the Fed offers to commercial banks for overnight reserve loans. 9-7 Money Market Rates, II. 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. Certificate of deposit (CD)- Large-denomination deposits of $100,000 or more at commercial banks for a specified term. Bankers acceptance- A postdated check on which a bank has guaranteed payment. Commonly used to finance international trade transactions. 9-8 Money Market Rates, III. Eurodollars- U.S. dollar denominated deposits in banks outside the United States. London Interbank Offered Rate (LIBOR)- Interest rate that international banks charge one another for overnight Eurodollar loans. U.S. Treasury bill (T-bill)- A short-term U.S. government debt instrument issued by the U.S. Treasury. 9-9 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. Bank Discount Basis Bond Equivalent Yields (BEY) Annual Percentage Rates (APR) Effective Annual Rates (EAR) 9-10 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 bankers acceptances. The formula is: Note that we use 360 days in a year in this (and many other) money market formula. The term discount yield here simply refers to the quoted interest rate....
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FIN355_Chapter9 - Chapter McGraw-Hill/Irwin 9 Interest...

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