Interest+Rates+-+Part+II+-+F11

# Interest+Rates+-+Part+II+-+F11 - INTEREST RATES RATES Bond...

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INTEREST INTEREST RATES RATES

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Bond Prices and Interest Rates Bond Prices and Interest Rates Formulas: • P bond = F / (1+i) n • P bond = C/(1+i) + C/(1+i) 2 + C/(1+i) 3 + ……. + C/(1+i) n + F/(1+i) n – Note: As i increases, P bond falls Nick Noble Interest Rates Eco 301 - Fall 2011 2
Outline Outline Interest Rates on Bonds Discount bonds Coupon bonds Bond prices and bond interest rates move in opposite directions The Bond Market Bond demand Bond supply Bond market equilibrium Nick Noble Interest Rates Eco 301 - Fall 2011 3

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Bond Prices and Interest Rates Bond Prices and Interest Rates Question? With a bond at a given price, what is the interest rate on that bond? Nick Noble Interest Rates Eco 301 - Fall 2011 4
Bond Prices and Interest Rates Bond Prices and Interest Rates Discount Bond Yield (interest rate) on a discount basis But should be: Nick Noble Interest Rates - = maturity to days of number 360 x F P F i - = maturity to days of number 360 x P P F i Eco 301 - Fall 2011 5

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Bond Prices and Interest Rates Discount Bond One year bond Or Nick Noble Interest Rates i = F - P P x 360 numberof daystomaturity P P F i - = i) (1 F P or i) P(1 F or iP P F or iP P F + = + = + = = - Eco 301 - Fall 2011 6
Bond Prices and Interest Rates Discount Bond Discount Bond Price (P) =\$950, Face Value (F)=\$1000 Matures in 6 months (180 days) i=[(1000-950)/950]*2 = .105 or 10.5% Nick Noble Interest Rates i = F - P P x 360 numberof daystomaturity Eco 301 - Fall 2011 7

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Bond Prices and Interest Rates Bond Prices and Interest Rates Coupon Bond – Coupon rate - i c – Current yield (rate) = C/P where C=i c F Total Rate of Return Nick Noble Interest Rates t t 1 t P P P P C R - + = + Eco 301 - Fall 2011 8
Bond Prices and Interest Rates Bond Prices and Interest Rates Coupon Bond Average Yield to maturity Financial calculator P = C/(1+i) + C/(1+i) 2 +C/(1+i) 3 +… +C/(1+i) n + F/ (1+i) n Solve for i Nick Noble Interest Rates ( 29 P /n P F P C i - + = Eco 301 - Fall 2011 9

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## This note was uploaded on 10/19/2011 for the course ECON 301 taught by Professor Staff during the Spring '11 term at Miami University.

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Interest+Rates+-+Part+II+-+F11 - INTEREST RATES RATES Bond...

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