06-Present Value&Risk

06-Present Value&Risk - Class Business Current...

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Class Business Current Events Case Four Types of Credit Instruments 1. Simple loan 2. Fixed-payment loan 3. Coupon bond 4. Discount (zero coupon) bond Concept of Present Value Simple loan of $1 at 10% interest Y e a r123n $1.10 $1.21 $1.33 $1x(1 + i ) n $1 PV of future of $1 = (1 + i ) n Chapter 4: Present Value
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Yield to Maturity Yield to maturity = interest rate that equates today’s value with present value of all future payments Need Today’s Price or ‘Value’ to find implicit interest rate Like Internal Rate of Return Yield to Maturity: Loans 1. Simple Loan ( interest payment = 10%, on $100 loan) $100 = $110/(1 + i ) $110 – $100 $10 i = ————— = —— = .10 = 10% $100 $100 2. Fixed Payment Loan ( interest rate = 12%, T=25 years, $1000 Loan, assume $126 annual payment) $126 $126 $126 $126 $1000 = ——— + ——— + ——— + . .. + ——— (1+ i ) (1+ i ) 2 (1+ i ) 3 (1+ i ) 25 FP FP FP FP Loan = ——— + ——— + ——— + . .. + ——— Amount (1+ i ) (1+ i ) 2 (1+ i ) 3 (1+ i ) 25
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Yield to Maturity: Bonds 4. Discount Bond ( P db = $900, F = $1000) $1000 $900 = ——— (1+ i ) $1000 – $900 i = —————— = .111 = 11.1% $900 F P db i = ——— P
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This note was uploaded on 11/22/2011 for the course ECONOMIC ManEc352 taught by Professor Keithvorkink during the Winter '11 term at BYU.

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06-Present Value&Risk - Class Business Current...

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