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32 Cards in this Set

  • Front
  • Back
Fisher Equation
Nominal interest rate= real interest rate + expected inflation rate
Present Value
A dollar paid to you one year from now is less valuable than a dollar paid to you today
Simple Present Value
Present Value= Future Cash Flow Payment/ Interest rate^maturity
Four Types of Credit Market Instruments
Simple Loan
Fixed Payment Loan
Coupon Bond
Discount Bond
Simple Loan
Lender provides the borrower with a principal that must be repaid by the maturity date with interest
Fixed-Payment loan is also known as
Amortized loan
Coupon Bond
The owner of the bond receives a fixed interest payment every year until the maturity date when the face value is repaid.
Face value is also known as
Par value
Coupon Rate
The dollar amount of the yearly coupon payment expressed as a percentage of the face value of the bond
Coupon Rate Formula
Coupon Rate= Yearly Coupon payment/ Face Value
Discount Bond is also known as
Zero-Coupon Bond
Fixed-Payment Loan
Lender provides the borrower a principal that must be repaid with interest as an annuity.
Yield to Maturity
The interest rate that equates the present value of cash flow payments received from a debt instrument with its value today
When the coupon bond is priced at its face value..
The yield to maturity equals the coupon rate
Ex ante real interest rate
is adjusted for expected changes in the price level
The price of a coupon bond and the yield to maturity are
Negatively related
Consol is also known as
Perpetuity
The yield to maturity is greater than the coupon rate when the bond price is
Below its face value
For simple loans, the simple interest rate..
Equals the yield to maturity
Consol
A bond with no maturity date that does not repay principal but pays fixed coupon payments forever
Discount Bond
Bought at a price below its face value and the face value must be repaid at a maturity date
Consol Bond Formula
Yield to Maturity of Consol= Yearly Interest Payment/ Price of Consol
Discount Bond Formula
Interest= Face Value of Discount Bond- Current Price of Discount Bond/ Face Value of Discount Bond
Current bond prices and interest rates are
Negatively related
Rate of Return
Payments to the owner plus change of value expressed in a fraction of the purchase price
The return equals the yield to maturity only
if the holding period equals the time to maturity
A rise in interest rates is associated with a fall in bond prices
resulting in a capital loss if time to maturity is longer than the holding period
The more distant a bond’s maturity,
the greater the size of the percentage price change associated with an interest-rate change
PV Interest Rates Formula
Present Value x Interest Rate
Nominal interest rate
makes no allowance for inflation
Ex post real interest rate
is adjusted for actual changes in the price level
Real interest rate is
adjusted for changes in price level so it more accurately reflects the cost of borrowing