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43 Cards in this Set

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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 = 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.
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 + Pt-1 - 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
Pt-1 - 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 ____interest-rate 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