ECON 2035 Study Guide - Interest Rate, Credit Risk, Rational Expectations
Document Summary
Security prices based on what is expected to receive from securities. Ex. account: with 10% interest rate o o. Present value of future payment n years from now: pv = / (1 + i) . Get face value when bond matures: fv= , coupon payment = , coupon rate = 5% o, p = (5/(1+i)) + (5/(1+i) ) + (100/ (1+i) ) 2 yr bond ( 2 years til maturity) i= yield to maturity lower the yield the higher the price of bonds o o. Price below fv = discount rate i above coupon rate. Price < fv = discount rate i > coupon rate. Price above fv = premium then i below coupon rate. P = (cp / i) o: pv= (10 / (1+i)^(1/12)) P=(d /(1+i)) + (d /(1+i) ) + (d / (1+i) ) + : d= dividends, rational expectations, using all relevant information you are making you best possible forecast of the future event.
