PADP 6930 Lecture Notes - Lecture 5: Call Option, Real Interest Rate, Interest

• School: University of Georgia
• Department: Public Administration and Policy
• Course: PADP 6930
• Professor: Moldogaziev

Document Summary

Lecture 5a : time value of money and derivation of interest rate(s) Nominal interest rates: the rates actually observed in nancial markets. Affect the values (prices) of securities/assets traded in money & capital markets. Negative interest rates to discourage investment: various measures. Coupon rate > periodic cash ow a bond issuer contractually promises to pay a bond holder. Required rate of return (rrr) > rates used by individual market participants to calculate fair present values (pv) Expected rate of return (err) > rates participants would earn by buying securities at current market prices (p) Realized rate of return (irr) > rates actually earned on investments. Internal rate of return (irr) > when npv = 0 (in equation, costs are negative & bene ts are positive) Rates must match participants" perspectives for deals to occur: discounting vs. compounding. Discounting > adjusts sums to be received in the future to their present- value equivalent.