EC223 Chapter Notes - Chapter 4: Nominal Interest Rate, Real Interest Rate, Zero-Coupon Bond

69 views3 pages
26 Jan 2013
School
Department
Course

Document Summary

Different debt instruments have very different streams of cash payments to the holder known as cash flows with very different timing. Based on the fact that a dollar paid to you one year from now is less valuable to you than a dollar paid to you today. Simple loan the lender provides the borrower with an amount of funds that must be repaid to the lender at the maturity date, along with an additional payment for interest. The interest rate that equates the present value of cash flow payments received froma debt instrument with its value today. The simple interest rate equals the yield to maturity. The borrower makes the same payment to the bank every month until the maturity date, when the loan will be completely paid off. We equate today"s value of the loan with its present value. Same strategy used for the fixed-payment loan: equate today"s value of the bond with its present value.

Get access

Grade+20% off
$8 USD/m$10 USD/m
Billed $96 USD annually
Grade+
Homework Help
Study Guides
Textbook Solutions
Class Notes
Textbook Notes
Booster Class
40 Verified Answers
Class+
$8 USD/m
Billed $96 USD annually
Class+
Homework Help
Study Guides
Textbook Solutions
Class Notes
Textbook Notes
Booster Class
30 Verified Answers

Related Documents

Related Questions