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12 February 2013 Econ 202

If you pay 9000 today you will either get 10000 or 0

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If you pay $9,000 today you will either get $10,000  or $0 if you hold the bond to maturity Stocks (form of a bond) o Indirect finance Banks (firm doesn’t go directly to the household to the  borrowers) You save in a bank and a firm goes to the bank to borrow Two bond price principles Dollar price dictates interest rate o Think of R as: rate of return on initial payout growth rate of initial payout  R = (p1 – p0)/p0 p1 = face value p0 = initial payout R = (10,000 – 9,000)/9,000 = 11.11% If we know payout and face value we can determine interest rate o In addition if you know interest rate you can determine dollar amount Dollar price and R move opposite o By definition Ratings agencies Moody’s  Rating indicates default risk and therefore determines your interest rate o Higher default risk means lower prices for a bond Lower the dollar price the higher the interest rate
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03/06/2013 14:18:00
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03/06/2013 14:18:00
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If you pay 9000 today you will either get 10000 or 0 if you...

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