2-4 - 2-4 Different debt instruments have very difn streams...

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2-4 Different debt instruments have very difn streams of cash flows w/ difn timing. Use Present value analysis (Yield to maturity) PV- equiv cash flow in year 1 Simple loans- loan principal, maturity date, interest payment, simple interest rate Ytm, interest rate that equates today’s value w/ PV of all future payments Fixed payment loan- loan principal and interest are repaid in several payments in equal dollar amounts Discount bonds- 1 yr, purchase price is discounted. Don’t get interest payments, but a year from now, will get 1000. If i increases, the PV of any given cash flow is lower; hence, the price of the bond must be lower. Current Yield- Yield on a discount basis- Real interest rate- more accurately reflects the true cost of borrowing ir = i e When the real rate is low, there are greater incentives to borrow and less to lend.
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