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