MGMT 1B Lecture Notes - Lecture 4: Effective Interest Rate, Interest Rate, Interest Expense
Document Summary
Par value (principal, face value): the amount of money due on the maturity date of a bond, not including interest aka at the end. Market interest rate (effective interest rate, yield to maturity): the minimum rate of interest that investors will accept (rate that market would provide on a similar investment on a similar risk) *nominal interest rate and market interest rate may not always equal. Bonds typically have a par value of . Some bonds are publicly traded; their prices are quoted as a percentage of par value ex. ) a closing price of means the bond is trading at 102% of = . Interest payments are usually made semi annually. The coupon rate is set by the firm"s board of directors and is as close to the market rate as possible. Discount back to present value using market rate (investor implicitly getting rate of market rate) Price = pv (principal) + pv of annuity (interest payments)
