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ECON 3P03 (19)
Lecture

Other measures of Interest Rates.docx

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Department
Economics
Course
ECON 3P03
Professor
Zisimos Koustas
Semester
Fall

Description
Other measures of Interest Rates Current yield It is an approximation of the yield to maturity on coupon bonds Current yield: Ic=c/p C= annual coupon payment P= price of the coupon bond The advantage of current yield is the simplicity of calculation. It is a very good approximation of the yield to maturity for long maturities (say 20 years or more). Not so for shorter maturities (say 5 years or less) Yield on a discount basis applies to treasury bills with less than a year to maturity. It is defined on an annualized basis by the following. Formula: iab = (F-P)/P*365/(days to maturity) iab: yield on a discount (annualized) basis F: fase value of the discount bond P: purchase price of the discount bond Distinction between interest rates and returns Rate of return (holding-period yield), Assume a holding period of one year RET = [C+Pt+1-Pt]/Pt = ic+g where: ic = C/Pt=current yield , g = [Pt+1-Pt]/Pt = percent capital gain (or less) Key findings 1. The only bond whose return (holding period yield) equals its yield to maturity is one with maturity equal to the holding period. 2. For bonds with maturity > holding period,i↑ → Pb↓ implying capital loss . 3. The longer is the maturity, the greater is the price change associated with an interest rate change. 4. The longer is the maturity, the more return (holding –period yield) changes with a change in interest rate. 5. A bond with high initial interest rate can still have a negative return (holding—period yii↑.) if Conclusion from our analysis 1. Prices and retu
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