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# slides03 - Mishkin ch.4 Interest Rates Summary 1 Three key...

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[Notes on Mishkin Ch.4 - P.1] Mishkin ch.4: Interest Rates Summary 1. Three key concepts: Present Value Yield to Maturity Total Return 2. Practical applications: Real versus nominal PV of stocks: Discounted dividends Inflation-indexed bonds Tracking total returns 3. Know how to work with the key concepts: Task in Exams = Problem solving

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[Notes on Mishkin Ch.4 - P.2] Fundamentals • Present Value: PV t = Payment t+1 (1+i) + Payment t+2 (1+i) 2 + . .. + Payment t+N (1+i) N i = discount rate = interest rate used to discount future payments • Yield to Maturity (or simply: Yield) = Particular discount rate i that solves P B = PV t = Payment t+1 (1+i) + Payment t+2 (1+i) 2 +...+ Payment t+N (1+i) N One-period example (Treasury Bill promises \$10,000 at maturity) P B = 10000 (1+i) => (1+i) = 10000 P B => i = 10000-P B P B
[Notes on Mishkin Ch.4 - P.3] Application: Coupon Bonds Identify a particular bond : Data that stay FIXED from issue to maturity F = Face Value F C = Coupon => Coupon rate

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slides03 - Mishkin ch.4 Interest Rates Summary 1 Three key...

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