E305 Chapter 4 - Chapter 4 Understanding Interest Rates MEASURING INTEREST RATES Present Value Dollar paid to you one year from now is less valuable to

E305 Chapter 4 - Chapter 4 Understanding Interest Rates...

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Chapter 4_ Understanding Interest Rates MEASURING INTEREST RATES Present Value Dollar paid to you one year from now is less valuable to you than a dollar paid to you today Simple Loan – lender give borrower an amount of fund (principal) that must be repaid to the lender at the maturity date, along with additional payment for interest PV = Four Types of Credit Market Instruments 1. Simple loan e.g. commercial loans to businesses 2. Fixed Payment loan (fully amortized loan) Lender give borrower an amount of funds, which must be repaid by making the same PMT every period, consisting of part of the principal and interest for a set number of years. 3. Coupon Bond Coupon bond pays the owner of the bond a fixed interest payment (coupon payment) every year until the maturity date, when a specified final amount (face value/ par) is repaid. A coupon bond is identified by 3 pieces of information First is the corporation / government agency that issues the bond Second is the maturity date of the bond

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