Chapter 4 Flashcards
What is present value?
Present discounted value
What it is currently worth
What is cash flow?
Different stream of payments to the holder
When is a dollar worth the most?
In the present
You can put a dollar in a savings account that earns interest
What is a simple loan?
Lender provides borrower with the amount of funds that most be repaid at a maturity date
What else would you be happy with besides just a dollar?
The dollar plus it’s interest in a year
What is discounting the future?
Process of calculating today’s value of dollars received in the future
What is a fixed payment loan?
Fully authorized loan
Lender provides borrower with an amount of funds that must be repaid by making the same payment every period
Auto loans and mortgages
What is a coupon bond?
Owner pays a fixed interest payment until the maturity date
What pieces of information are parts of a coupon bond?
Face value
Cooperation of government that issued the bond
Maturity date
Coupon rate
U.S. treasury bonds
What is a discount bond?
Zero coupon bond
Bought at a price below face value
No interest payments
What is hails to maturity?
Interest rate that equates present value of payments received to its current value
Considered most accurate
What should simple interest rate equal in simple loans?
Yield to maturity
What is interesting about yield to maturity for bond prices?
When at face value YTM equals compound rate
Price of coupon bond and YTM are negatively related
YTM is greater than coupon rate when price is below face value
As i increases what happens to other things?
All denominators in the bond price formula decrease
What is a consol or perpetuity?
Perpetual bond with no maturity date and no repayment of principal.
