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massign11 - Money and Banking N Sheflin ASSIGNMENT 11 NOTES...

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Money and Banking N. Sheflin ASSIGNMENT 11 NOTES : Measuring interest rates, bond pricing, Discounting, Discounted Dividends model. The only formulas you need to memorize are: present value (yield to maturity), pv of a perpetuity, discounted dividends model, rule of 72. Watch out for Croushore’s car leasing analysis (ask me why) Also Investment Game Round 4 – Bonds (cannot buy them in Marketwatch, but much to read about and do). EARLY WARNING FINAL EXAM coming - do not make travel plans for Thursday December 16, noon – there is no makeup for the final unless there is a conflict or major, documented personal illness or catastrophe. Much more information will be coming over the next weeks, including: a review guide, a set of essential questions, help with EXAM WILL BE HELD ON THE OFFICIALLY SCHEDULED DATE. READING Croushore 4 Also, http://en.wikipedia.org/wiki/Time_value_of_money (don’t worry about all the equations – just know where to look them up Discounted dividends model at http://en.wikipedia.org/wiki/Gordon_model and maybe: http://www.moneychimp.com/articles/valuation/buffett_calc.htm and http://www.moneychimp.com/articles/valuation/dcf.htm KEY POINTS Interest Rates o simple and compound interest o discrete and continuous compounding and growth o rule of 72 Present value and discounting o Discrete and continuous discounting o Yield to maturity o Why discount? Consols/Perpetuities Bond pricing o interest measures: coupon rate, current yield, yield to maturity, yield to call o zero coupon bonds o interest rates, and maturity Discounted dividends model nominal vs real rates – Fisher’s equation
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Note i=r=interest rate COMPOUNDING AND PRESENT VALUE 1. Future Value (FV) = Present Value (PV) x (1+i) n ex $100 in bank for 2 years at 10% = 100x(1+.1) 2 = 121 2. Present Value (PV) =Future Value (FV) / (1+i) n ex $121 in 2 years at 10% is equivalent to $100 today o The PV is the amount you could put in the bank today to grow to the FV in n years; i.e., we discount (remove) from the FV the interest that would have been earned over the n years. We discount because
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