FINE 2000 Study Guide - Midterm Guide: Risk-Free Interest Rate, Risk Premium, Yield Curve

60 views3 pages
16 Jul 2016

Document Summary

Must discount the expected future cash flows at an appropriate discount rate. Price of bond = pv of coupon payments + pv of principle r = discount rate; required rate of return, ytm, cost of capital. Discount rate is made up of risk free rate + risk premium. Risk free rate is return on us gov bond b/c that security is considered most safe. Payment at the maturity is called the face value or par value: assume coupon is unless otherwise stated. Annualized rate of return = (annualized coupon income + price change) / investment. Ann coupon income = (1 + period coupon rate)^# of periods. After tax interest income = income(1 -tax rate) After tax capital income = cap gain -cap gain/2(tax rate) Look at sensitivity of price changes for bond yields, as maturity increases. Longer maturity has more volatile price changes for a given change in yield.

Get access

Grade+20% off
$8 USD/m$10 USD/m
Billed $96 USD annually
Homework Help
Study Guides
Textbook Solutions
Class Notes
Textbook Notes
Booster Class
40 Verified Answers
Win an iPhone 13
Get a subscription and follow on TikTok for a chance to win an iPhone 13. Learn more

Related Documents

Related Questions