FIN4520-Chapter4

FIN4520-Chapter4 - Interest Rates Chapter 4 1 Types of...

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Interest Rates Chapter 4 1
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Types of Rates Treasury rate – rate earned on T-bills and T-bonds Commonly used as risk-free rate in textbooks LIBOR (London Interbank Offer Rate) - rate at which a bank is willing to loan funds to another bank. This is financial institution’s opportunity cost of capital. Repo rates - rate on a repo transaction A company agrees to sell securities to another company and buy them back later at a higher price. The difference between the purchase and sales price is the interest earned by the second company who is providing a loan. 2
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More Definitions Zero or Spot interest rate - rate on bond that has only one cash flow to the investor: R n is the n- year spot rate. pure discount bond yield - rate on bond that pays no coupons, the face value is received at maturity zero-coupon bond yield - rate on bond that pays no coupons, all interest and principal is received at maturity 3
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Even More Definitions Forward interest rate - rate on bonds where the
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FIN4520-Chapter4 - Interest Rates Chapter 4 1 Types of...

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