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Chapter 3 Asset Prices And Interest Rates (97% in the course

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Department
Economics
Course
ECON 2035
Professor
All Professors
Semester
Fall

Description
Chapter 3 Security Pricesbased on what is expected to receive from securities Ex account 100 with 10 interest rate o1yr11010011 o2yr1211001111 or 10011Present Value of Futureo1yr 10011100o2yr 121 11100o3yr 100100 200 Present Value of Future 1 payment n years from nowoPV11i BondsCoupon Bonds Yearly coupon payment determined by Face Value Get Face Value when bond matures oFV 100oCoupon Payment5oCoupon Rate5o2 yr Bond2 years til maturityoP51i51i100 1ii yield to maturitylower the yield the higher the price of bonds o10278for bondi4o100for bond i5PriceFV then iCoupon Rate Price below FVdiscount rate i above coupon ratePriceFVDiscount RateiCoupon Rate Price above FVPremium then i below coupon rate PriceFVPremium iCoupon Rate Cannot have full FV if bond does not mature CounsolPerpetuity Special Coupon Bond oHas no Maturity Date oPCP1iCP1iCP1i PCPi o10001251i1251i 1251i25i12oPV 101i112Stock Prices PD 1iD 1iD1i oD dividends Rational ExpectationsoUsing all relevant information you are making you best possible forecast ofthe future event Forecast may not be correct but the average of forecast should be correct errors should average to 0 BondsUS treasury bonds issued by federal governmenthave 0 default risk RiskFree isafe oP C 1 isafeC 1 isafeCorporate bond vs US treasury bondrisk premium oRisk premiumphiP C 1 isafeC 1 isafeoRisk premium is added to asset that have risk on it How fed effect asset pricesFed interest rates actually fed fed funds target oCausesisafe Default riskCauses iisafe
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