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comm 220: market analysis > chapter 10: understanding interest rates > Flashcards

chapter 10: understanding interest rates Flashcards

1
Q

yield to maturity

A

the most accurate measure of interest rates

what economists mean when they use the term interest rate

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2
Q

streams of cash payments to the holder

A

cash flows

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3
Q

present value or present discounted value

A

based on the commonsense notion that a dollar paid to you one year from now is less valuable to you than a dollar paid to you today

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4
Q

In this loan, the lender provides the principal that must be repaid to the lender at the maturity date along with an additional payment for the interest

A

a simple loan

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5
Q

simple interest rate

A

the interest payment divided by the amount of the loan

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6
Q

The process of calculating today’s value of dollars received in the future

A

discounting the future

using PV

FV

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7
Q

forumla to calculate PV

A

PV = FV / (1 + i)^n

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8
Q

four basic types of credit market instruments

A

A simple loan

fixed-payment loan (fully amortized loan)

a coupon bond

A discount bond

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9
Q

fixed-payment loan (fully amortized loan)

A

the lender provides the borrower with an amount of funds, which must be repaid by making the same payment every period (such as a month)

must pay the debt service you already know

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10
Q

a coupon bond

A

pays the owner of the bond a fixed interest payment (coupon payment) every year until the maturity date

at the maturity date, a specified final amount is repaid

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11
Q

face value or par value of a bond

A

amount you have to repay at the maturity date

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12
Q

three pieces of information that define a bond

A
  1. the corporation or government agency that issues the bond
  2. the maturity date of the bond
  3. the bond’s coupon rate
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13
Q

the bond’s coupon rate

A

the dollar amount of the yearly coupon payment expressed as a percentage of the face value of the bond

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14
Q

A discount bond (also called a zero-coupon bond)

A

bought at a price below its face value (at discount)

the face value is repaid at the maturity date

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15
Q

bond bought at discount

A

bought at a price below its face value

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16
Q

most important way of calculating interest rates

A

the yield to maturity

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17
Q

the yield to maturity

A

the interest rate that equates the present value of cash flow payments received from a debt instrument with its value today

the internal rate of return required for the present value of all the future cash flows of the bond (face value and coupon payments) to equal the current bond price

18
Q

for which loan does the simple interest rate equals the yield to maturity?

A

for the simple loan

19
Q

formula of loan with payment to give (present value)?

A

LV = PMT * (1 - (1 + r)^(-n))/r

LV = loan value

20
Q

formula of coupon bond

A

P = C / (1 + i)^n + F / (1 + i)^n

C = yearly coupon payment

F = face value of bond

P = price of bond

21
Q

when the the yield to maturity equals the coupon rate of a coupon bond, whats its price?

A

coupon bond priced at its face value

22
Q

when the the yield to maturity is greater than the coupon rate of a coupon bond, whats its price?

A

the bond price is below its face value

23
Q

when the the yield to maturity is below than the coupon rate of a coupon bond, whats its price?

A

the bond price is above its face value

24
Q

what do we mean when we say that he price of a coupon bond and the yield to maturity are negatively related?

A

as the yield to maturity rises, the price of the bond falls

As the yield to maturity falls, the price of the bond rises

25
Q

consol or a perpetuity

A

a perpetual bond with no maturity date and no repayment of principal that makes fixed coupon payments of $C forever

26
Q

formula of perpetuity

A

Pc = C / ic

Pc = price of perpetuity

C = yearly payment

ic = yield to maturity

27
Q

current yield

A

the yearly coupon payment divided by the price of the security

ic = C / Pc

Pc = price of perpetuity

C = yearly payment

ic = yield to maturity

28
Q

The yield-to-maturity calculation for a discount bond

A

similar to that for the simple loan

PV = FV / (1 + i)^n

29
Q

rate of return

A

For any security, the rate of return is defined as the payments to the owner plus the change in its value

expressed as a fraction of its purchase price

30
Q

will the return on a bond necessarily equal the yield to maturity on that bond?

A

nah bruuuv

the distinction between interest rate and return can be important

31
Q

formula for rate of return on a coupon bond

A

RET = (C + Pt+1 - P1) / (Pt)

RET + return from holding the bond from time t to time t + 1

Pt = price of the bond at time t
Pt+1 = price of the bond at time t + 1
C = coupon payment

RET = (C / P) + ((P+1 - P) / P)

first term C/P is the current yield ic (the coupon payment over the purchase price)

The second term is the rate of capital gain

RET= ic + g

g = he rate of capital gain

32
Q

what does a rise in interest mean for someone holding a bond?

A

the price of the bond has fallen

if he sells it then, it will result in a capital loss

33
Q

what does the finding that the prices of longer-maturity bonds respond more dramatically to changes in interest rates explain?

A

prices and returns for long-term bonds are more volatile than those for shorter-term bonds

long term bonds are riskier

34
Q

interest-rate risk

A

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

35
Q

which have a more important interest-rate risk, long term or short term bonds?

A

long term bonds

36
Q

which types of bonds have no interest-rate risk? why?

A

any bond whose time to maturity matches the holding period

the price at the end of the holding period is already fixed at the face value

he change in interest rates can then have no effect on the price at the end of the holding period for these bonds

he return will therefore be equal to the yield to maturity known at the time the bond is purchased

37
Q

nominal interest rate

A

interest rate disregarding inflation rate

38
Q

real interest rate

A

the interest rate that is adjusted by subtracting inflation

it more accurately reflects the true cost of borrowing

39
Q

ex post real interest rate

A

The interest rate that is adjusted for actual changes in the price level

Nominal interest rate - inflation rate

describes how well a lender has done in real terms after the fact

40
Q

real interest rate equation (Fisher equation)

A

i = ir + pi^e

i = nominal interest rate

ir = real interest rate

pi^e = expected rate of inflation

ir = i - pi^e

41
Q

indexed bonds

A

interest and principal payments are adjusted for changes in the price level

42
Q

Ex ante real interest rate

A

Nominal Interest rate - expected inflation rate

comm 220: market analysis (37 decks)

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