COMM 220 Study Guide - Final Guide: Interest Rate Risk, Opportunity Cost, Deposit Insurance
7 Apr 2017
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Borrow to consume more now at the cost of having less later; lend to consume more later by giving up some now. Having the choice of shifting consumption across time leaves us better off. The price of a bond at any time depends on the market"s expectation that the issuing company can make the interest payments as they come due and then repay the face value at maturity. Changes in the price of a bond caused by changes in the company"s prospects are called the default risk. Changes in the price of a bond that"s caused by changes in interest rates are called the interest rate risk. This bond matures in 25 years and will pay interest at a rate of 5% on a par value of ,000. That"s 50 payments of because the coupons are paid semi- annually.
