Macro Essential

Question 1

Present value

Answer 1

Value today of future cash flow

Are you are are paid to you when year from now is less valuable to you than the EuroPay to you today

Question 2

Simple loan

Answer 2

Lender provides borrower F principal
There must be repaired at maturity date together with additional payment C interest

Simple interest rateC/F

Question 3

Fixed payment loan

Answer 3

must be repaired by making the same payment every period consisting part of the principal and part of interest

Question 4

Coupon bond

Answer 4

Receive p
Pays the owner of bond of fixed interest payment /coupon payment every year until the maturity date when the face value: the final value is repaid
Coupon rate c/F

Eg UK gov bond (consol, which is what perpetuity

Question 5

Discount bond/ Zero-coupon bond

Answer 5

Is bought at price below F(ie borrower get p

Question 6

Yield to maturity

Answer 6

Interest rate that equates present value of all future cash flow to current price

Question 7

Rate of return

Answer 7

Gain on asset as a proportion of price

Question 8

Primary market

Answer 8

Markets in which new issues of bond is sold by government agency or corporation borrowing funds

Question 9

Secondary market

Answer 9

Market in which previously issued funds are traded

Question 10

Index linked bonds

Answer 10

Bond with coupon and redemption payments based on inflation adjusted face value eg F’=(1+pi) F

Question 11

Risk premium

Answer 11

The difference between the interest rate on ones with default risk and default free bond

Question 12

Term structure of interest rates

Answer 12

Relationship Among ir on bonds of different terms to maturity

Question 13

Yield curve

Answer 13

Yield to maturity against term to maturity