EC223 Lecture Notes - Lecture 6: Nominal Interest Rate, Zero-Coupon Bond, Cash Flow
Document Summary
Four types of credit market instruments: a simple loan, fixed-payment loan, coupon bond, discount bond. Distinction among interest rates, rates of returns and yield to maturity. A dollar deposited today can earn interest and become. Simple loan: principal is repaid at the maturity date with interest. Fixed payment loan (fully amortized loan: principal and interest are repaid by making the same payment every period for a set period of time. If the coupon bond has a yearly coupon payment of and a face value of , the coupon rate is / = 0. 10 or 10% Discount bond: also called a zero-coupon bond is bought at a price below its face value (at a discount) and the face value is repaid at the maturity date, no interest payments. Interest rate that equates the present value of cash flow payments received from a debt instrument with its value today. Economists consider it the most accurate measure of interest rate.
