Econ330 Ch4 Vocab And Equations

Front 1

present value

Back 1

a dollar paid to you one year from now is less valuable to you than a dollar paid to you today

PV = CF/(1+i)n

Front 2

fixed pmt/fully amortized loan

Back 2

must be repaid by the same pmt every pd consisting of a part of the principal and interest for a set number of years

Front 3

coupon bond

Back 3

pays the owner a fixed interest pmt every year until the maturity date, when a specified final amount (FV or par value) is repaid
identified by:
corp/govt that issues it
maturity date
coupon rate ($ amt of yearly pmt expressed as % of the FV of the bond)

Front 4

discount bond/zero coupon bond

Back 4

bought at a price below its FV (at a discount) and the FV is repaid at maturity
doesn't make interest pmts
US Tbills, US savings bonds

Front 5

simple loans

Back 5

pmt at maturity

Front 6

yield to maturity

Back 6

interest rate that equates the PV of CF pmts received from a debt instrument with its value today; most accurate measure of interest rates

Front 7

YTM: simple loan

Back 7

simple interest rate = YTM

Front 8

Future value (FV) or future
cash flow (CF) of an investment of PV in n
years at interest rate i (measured as a
decimal, or 10% = .10)

Back 8

FVn = PV*(1+i)n

Front 9

Basis point

Back 9

fraction of a percentage point; 1 1/100th of a percentage point, .01%

Front 10

Important Properties of Present Value
Present Value is higher:

Back 10

1. The higher the future value (FV) of the payment.
2. The shorter the time period until payment. (n)
3. The lower the interest rate. (i)
PV=CF/(1+i)n

Front 11

Consols

Back 11

make periodic interest payments forever,
never repaying the principal that was borrowed. (There
aren’t many examples of these.)

Front 12

Fixed Pmt Loans

Back 12

The same cash flow payment every period throughout
the life of the loan
LV = loan value
FP = fixed yearly payment
n = number of years until maturity
LV = FP FP FP . . . + FP
1 + (1 + ) (1 + ) (1 + )n

Front 13

Coupon Bond - YTM

Back 13

PV is calculated as the sum of the PVs of all pmts plus PV of the final pmt of the FV of the bond
Pb = [C/1+i + C/(1+i)2 + C/(1+i)3 . . . + C/(1+i)n +F/(1+i)n

Front 14

When CB is priced at its FV

Back 14

YTM = CR

Front 15

When YTM rises/falls, P of bond

Back 15

falls/rises
negatively related

Front 16

YTM is ____ than the CR when the bond price is below its FV

Back 16

greater than

Front 17

Consol

Back 17

• Infinite maturity
• No face value ( does not repay principal)
• Fixed coupon payment of C (dollars) forever.
P = C / i (YTM)

Front 18

as YTM of consol bonds increases, P of bond _____

Back 18

falls

Front 19

current yield

Back 19

yearly coupon pmt divided by the price of the security for LT bonds

Front 20

YTM for 1yr discount bond

Back 20

i = F-P/P
= increase in price over the year divided by the initial price; should be positive
yield to maturity is
negatively related to the current bond price.

Front 21

YTM on a discount bond

Back 21

(FV/P)^(1/n) - 1
sold at some price P, and pays a larger amount (FV) after t years. There is no periodic interest payment.

Front 22

return/rate of return

Back 22

how well a person does by holding a bond or any other security over a particular time pd.
pmt to owner + change in value expressed as a fraction of purchase price
return does not necessarily = YTM on that bond

Front 23

return on a bond held from time t to time t+1

Back 23

R=(C+ Pt+1 - Pt)/Pt
or
C/Pt + Pt-1 - Pt/Pt

Front 24

Current yield

Back 24

C/Pt; coupon pmt over purchase price

Front 25

rate of capital gain

Back 25

change in bond's price relative to the initial purchase price
Pt-1 - Pt/Pt=g

Front 26

return on a bond

Back 26

=current yield + rate of capital gain
will differ from interest rate

Front 27

For Zero- Coupon Bonds or Discount Bonds
Given n: the price of a bond and the interest rate
move ______

Back 27

in opposite directions.

Front 28

The more distant a bond's maturity, the _____ the size of the % price change assoc. w/interest rate change

Back 28

greater

Front 29

more distant a bond's maturity. the ____ the rate of return that occurs as a result of increase in interest rate

Back 29

lower

Front 30

even though a bond has a substantial initial interest rate, its return can turn out ____ if interest rates rise

Back 30

negative

Front 31

prices and returns for LT bonds are more _____ than those for ST bonds

Back 31

volatile

Front 32

interest rate risk

Back 32

riskiness of an asset's return that results from interest rate changes

Front 33

2 characteristic of current yield

Back 33

1. Is a better approximation of yield to maturity, nearer
price is to par and longer is maturity of bond
2. Change in current yield always signals change in same
direction as yield to maturity

Front 34

The holding period return

Back 34

the return to holding a bond and selling it before maturity.
The holding period return can differ from the yield to maturity.

Front 35

There is ____interest-rate risk for any bond whose time to maturity matches the holding period

Back 35

no

Front 36

Reinvestment risk

Back 36

if holding pd. exceeds term to maturity, proceeds from sale of bond are reinvested at a new interest rate

Front 37

Nominal interest rate

Back 37

makes no allowance for inflation

Front 38

Real interest rate

Back 38

adjusted for changes in price level so it more accurately reflects the cost of borrowing

Front 39

Ex post real interest rate

Back 39

adjusted for actual
changes in the price level

Front 40

Ex ante real interest rate

Back 40

adjusted for expected changes in the price level

Front 41

Fisher Equation

Back 41

i = nominal interest rate
ir= real interest rate
πe = expected inflation rate
When the real interest rate is low,there are greater incentives to borrow and fewer incentives to lend.
The real interest rate is a better indicator of the incentives to
borrow and lend.
i = ir + piof e
nominal interest rate equals the real interest rate plus the expected rate of inflation

Front 42

when real interest rate is low there are ______ incentives to borrow and ______ incentives to lend

Back 42

greater
fewer

Front 43

indexed bonds

Back 43

interest and principla pmts are adjusted for changes in price level