Definition: Loan types: Pure Discount loan (The borrower receives money today and repays a single lump sum at some time in the future).TVM solver Treasury Bills (The government borrows money on a short-term basis by selling Treasury bills, or T-bills and pay a fixed amount at some time). TVM solver Coupon =cy=rd then p=100 Coupon<cy<rd then p<100 Discount Coupon>cy>rd then p>100 Premium Higher price Interest rate: Longer time, Lower coupon rate Higher reinvestment rate risk: Shorter term, higher coupon Interest rate up, bond price(PV) down Pmt=annual coupon rate*face value(FV) Munis tax lower/better than yields on taxable bonds. Yields on TB=Yield*(1-tax bracket) Zero Coupon Bonds: pay no coupons at all must be offered at a price that is much lower than its stated value Amortized Loan (Borrower replays parts of the loan amount over time). TVM solver Partial amortization: (borrower makes a payment every month of a fixed amount, and makes a single larger amount called balloon to pay off the loan) TVM solver: find pmt, then pv
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This note was uploaded on 11/24/2011 for the course FINANCE 340 taught by Professor White during the Fall '11 term at Maryland.