Chapter 4 Flashcards
** Do a PV and FV equation from notes or book.
Ch. 4 part 1 of notes
** Simple vs Compound Interest
Simple: principal x rate x time (in years) = interest
Compound: PV = FV/(1+r)^n
** Calculate a BOND problem from notes or book
Suppose you pay $900 for a $1,000 face-value 8% coupon bond that will mature in 10 years and you hold it until maturity. What annual interest rate will you be getting on that security?
(coupon rate is 8%, current yield is 8.89% and YTM is 9.60%)
** Coupon rate
The interest rate calculated by dividing the annual coupon payment on a bond by the face value of the bond.
** Current Yield
The annual coupon payment on a bond divided by the current price of the bond.
** Yield to Maturity (YTM) (internal rate of return)
The rate of discount (per annum) that makes the sum of the present values of all future payments of a security equal to its purchase price.
** Loanable Funds Model
Loanable funds represent funds lenders are willing to lend and that borrowers want to borrow.
** LFs - How are interest rates effected when:
Housing starts numbers are released and they show starts at an annual rate of 1.60 million units, much higher than expected.
The demand curve shifts to the right, causing interest rates to increase and quantity (demanded) to increase.
** LFs - How are interest rates effected when:
Concerned about the state of the economy, the FED buys securities in the open market.
The supply curve shifts to the right, causing interest rates to decrease and quantity to increase.
** LFs - How are interest rates effected when:
Oil prices have been falling recently, decreasing inflationary expectations.
The supply curve shifts to the right b/c people are saving more
The demand curve shifts to the left b/c people don’t want to spend more.
** Interest rates move procyclically, why? (3 reasons)
a. Inflationary expectations (I.E.) move procyclically
b. Fed policy is countercyclical
c. Borrowing moves procyclically
