class 2

Question 1

what is interest rate?

Answer 1

the promised price paid for the rental of funds

Question 2

what can we consider the interest rate as?

Answer 2

the exchange rate across time

Question 3

why can we consider interest rate the exchange rate across time?

Answer 3

because that is rate you have to pay to exchange future funds in to current funds or the rate you get when you exchange current funds into future funds

Question 4

what is present value?

Answer 4

the current value of a future cash flow

Question 5

what is future value?

Answer 5

the amount a cash flow will grow over time

Question 6

what is compounding?

Answer 6

the way to determine the future value of a cash flow today

Question 7

what are the 4 timing of cash flow payments?

Answer 7

simple loan
fixed payment loan
cupon bond
discount bond

Question 8

what is a simple loan?

Answer 8

one payment at a maturity date

Question 9

what is an example of a simple loan?

Answer 9

if I take out a loan for 100 dollars and in one year I have to pay 150 dollars

Question 10

what is a fixed payment loan?

Answer 10

multiple fixed payments at specified dates and no lump sum payment at maturity

Question 11

what is an example of a fixed payment loan?

Answer 11

a mortgage, pay a certain amount monthly or bi monthly until it is payed off

Question 12

what is a coupon bond?

Answer 12

a bond that pays fixed amount (the coupons) at fixed dates, plus a final payment of the face value at the maturity

Question 13

is the price of a coupon bond equal to its face value?

Answer 13

no typically not

Question 14

what is a discount bond?

Answer 14

a pond that pays 0 coupons (payments), only pays a finial payment at its maturity date (similar to a simple loan)

Question 15

what is another term for a discount bond?

Answer 15

zero coupon bond

Question 16

the canadian government has just issued a 10 year $1000 bond with a 4% coupon and semi annual payments, what cash payments (cash flow) will you receive if you hold the bond until maturity?

Answer 16

20 dollars every 6 months for 10 years and the 1000 dollar face value at maturity

Question 17

what is an example of zero coupon bonds?

Answer 17

treasury bill

Question 18

what price do zero coupon bonds sell at?

Answer 18

they sell at a cheaper price than their face value

Question 19

what is yield to maturity?

Answer 19

the expected interest rate per period if you buy a debt instrument at a current price and hold it to the maturity

Question 20

what equates the present value of all cash flow payments of a debt instrument with its value today?

Answer 20

intrest rate

Question 21

what is the formula for simple loans?

Answer 21

PV=CF/ (1+i)^n

Question 22

if the current price of a bond is higher than the face value how does that impact the yield to maturity?

Answer 22

the interest or yield to maturity goes down

Question 23

if the current price of a bond is lower than the face value how does that impact the yield to maturity?

Answer 23

the interest or yield to maturity goes up

Question 24

if the current price of the bond is equal to the face value how does that impact the yield to maturity?

Answer 24

the yield to maturity is equal to the coupon rate

Question 25

how are the price of a coupon bond and the yield to maturity related?

Answer 25

they are negatively related

Question 26

when does the return of a bond equal the yield to maturity?

Answer 26

only if the holding period equals the time to maturity

Question 27

even if a bond has a substantial initial interest rate, can the return still be negative?

Answer 27

yes it can be negative if interest rates rise

Question 28

if the time to maturity is longer than the holding period in a situation where a rise interest rates are associated with a fall in bond prices, how will that impact you?

Answer 28

you will receive a capital loss on that investment

Question 29

what are nominal interest rates?

Answer 29

the rates quoted by financial institutions, the rates at which your money will grow if invested for a certain period and don’t adjust for inflation

Question 30

what are real interest rates?

Answer 30

the rate of your purchasing power after adjusting for inflation and more accurately reflects the cost of borrowing

Question 31

what is the fisher equation?

Answer 31

R= nominal intrest rate - expected inflation rate