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43 Cards in this Set
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 Back
present value

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 

fixed pmt/fully amortized loan

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


coupon bond

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) 

discount bond/zero coupon bond

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 

simple loans

pmt at maturity


yield to maturity

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


YTM: simple loan

simple interest rate = YTM


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) 
FVn = PV*(1+i)n


Basis point

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


Important Properties of Present Value
Present Value is higher: 
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 

Consols

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

Fixed Pmt Loans

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 

Coupon Bond  YTM

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 

When CB is priced at its FV

YTM = CR


When YTM rises/falls, P of bond

falls/rises
negatively related 

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

greater than


Consol

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

as YTM of consol bonds increases, P of bond _____

falls


current yield

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


YTM for 1yr discount bond

i = FP/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. 

YTM on a discount bond

(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. 

return/rate of return

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 

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

R=(C+ Pt+1  Pt)/Pt
or C/Pt + Pt1  Pt/Pt 

Current yield

C/Pt; coupon pmt over purchase price


rate of capital gain

change in bond's price relative to the initial purchase price
Pt1  Pt/Pt=g 

return on a bond

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

For Zero Coupon Bonds or Discount Bonds
Given n: the price of a bond and the interest rate move ______ 
in opposite directions.


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

greater


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

lower


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

negative


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

volatile


interest rate risk

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


2 characteristic of current yield

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 

The holding period return

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

There is ____interestrate risk for any bond whose time to maturity matches the holding period

no


Reinvestment risk

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


Nominal interest rate

makes no allowance for inflation


Real interest rate

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


Ex post real interest rate

adjusted for actual
changes in the price level 

Ex ante real interest rate

adjusted for expected changes in the price level


Fisher Equation

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 

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

greater
fewer 

indexed bonds

interest and principla pmts are adjusted for changes in price level
