Chapter 3 - Interest Rates and Valuation

Question 1

Present Value

Answer 1

The value of a sum of money in the present, as opposed to some future value it will have when it has been invested

Question 2

Yield to Maturity

Answer 2

YTM is the ROI that makes the PV of a debt instrumental equal to its value today

Question 3

Debt instruments that incorporate PV concepts (2)

Answer 3

1. Loans

2. Bonds (coupon; discount)

Question 4

Coupon bond

Answer 4

Bond that makes a fixed payment at specific dates plus a final amount (face or par value) at maturity

Question 5

Perpetuity

Answer 5

A coupon bond providing a coupon forever with no maturity date
P=C/i

Question 6

Current yield

Answer 6

Approximation to the YTM for long-term bonds with price near par
icurrent = C/P

Question 7

Discount/Zero-Coupon Bond

Answer 7

Does not give any coupon but only FV at the end. Normally sells at a price below the face value.
E.g. T-bills

Question 8

Duration

Answer 8

Weighted average of the maturities of the cash payments

Longer duration the bigger the IRR

Question 9

What happens when duration increases? (3)

Answer 9

1. Maturity increases
2. CP=C/FV decreases
3. i decreases