Term
| 4 types of credit market instruments |
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Definition
Simple loan
Discount bond
Coupon bond
Fixed-payment loan |
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Term
| What sets the interest rates? |
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Definition
Interest rates are being set by the market forces
- It is being determined in the credit/debt market |
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Term
| When can the US government directly influence interest rates? |
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Definition
When the savers/lenders/buyers become the Fed, then the Fed will influence the interest rate in that specific market
The government cannot set the interest rate in the US |
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Term
| How do the different credit market instruments differ? |
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Definition
| From the time of their payment, how the money is returned/paid back |
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Term
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Definition
| The borrower receives from the lender an amount of funds called the principal and agrees to repay the lender the principal plus an additional amount called interest at the end of the period |
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Term
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Definition
The borrower pays the lender the amount of the loan, called the face value or par value, at maturity, but receives less than the face value initially
- Paid off at the end
- Bought for a cheaper price |
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Term
| What is the amount paid when a bond is received? |
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Definition
| Face Value (How much the borrower receives) |
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Term
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Definition
| The interest rate received every period |
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Term
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Definition
| The borrowers make multiple payments of interest at regular intervals and repay the face value at maturity |
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Term
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Definition
| The borrower makes regular periodic payments of interest and principal to the lender; at maturity there is no lump-sum payment of principal |
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Term
| What are the only aspects of credit market instruments that will be affected and change over time? |
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Definition
| Price (Present Value) and interest rates are the only things that will change over time |
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Term
| What does the idea of measuring present value mean? |
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Definition
A dollar paid to you one year from now is less valuable than a dollar paid to you today
- You could have invested that dollar and made money off of itHow |
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Term
| How can you calculate yield to maturity? |
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Definition
| $$$ X (1+Interest rate)^ # of years |
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Term
| What is the present value of $1 received n years in the future? |
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Definition
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Term
| What can the lender do with the present value equation? |
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Definition
| the lender can compare the present values of returns on different credit market instruments, even though the returns in any given period need not be comparable |
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Term
| What is the yield to maturity? |
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Definition
| The interest rate that equates the present value of an asset’s returns with its price today |
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Term
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Definition
| a measure that provides a way to compare interest rates of different instruments. |
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Term
| How do yield to maturity and specified interest rate compare in a simple loan? |
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Definition
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Term
| For a one-period discount bond, what is the yield to maturity? |
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Definition
(F – P)/P
where P is the discount price of the bond and F is its face value. |
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Term
| How does the price of a debt instrument compare to its present value? |
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Definition
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Term
| How do you find the current yield of a bond? |
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Definition
| Equals the coupon payment, C, divided by the current price of the bond, P |
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Term
| What happens if the current price of a bond is less than face value? |
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Definition
| the yield to maturity is greater than the current yield, which in turn is greater than the coupon rate |
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Term
| What happens if the current price of a bond is greater than the face value? |
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Definition
| The yield to maturity is less than the current yield, which in turn is less than the coupon rate |
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Term
| How are a bond's price and yield to maturity related? |
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Definition
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Term
| What is the total rate of return? |
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Definition
| the sum of current yield and actual capital gain or loss |
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Term
| Formula for total rate of return? |
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Definition
| R = C/Pt + (Pt+1 – Pt)/Pt. |
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Term
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Definition
| nominal interest rate adjusted for changes in purchasing power (inflation) |
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Term
| Expected real interest rate |
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Definition
| equals the nominal interest rate, i, minus the expected rate of inflation, πe, or r = i – πe. |
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Term
| What does the Fisher Hypothesis State? |
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Definition
| that the nominal interest rate rises or falls point- for-point with expected inflation |
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Term
| What does the real rate of return equal? |
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Definition
| equals the nominal rate of return adjusted for expected inflation |
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Term
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Definition
| A bond with no maturity date that does not repay principal but pays fixed coupon payments forever |
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Term
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Definition
Prices and returns for long-term bonds are more volatile than those for shorter-term bonds
There is no interest-rate risk for any bond whose time to maturity matches the holding period |
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