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Chapter 4

Chapter 4 Understanding Interest Rates

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ECON 310
Mohammed Akbar

Chapter 4 Understanding Interest RatesInterest ratethe cost of borrowing or the price paid for renting fundsAffects personal and business decisions such as whether to consume or save to buy a housecar or invest in stocks expand business etcPresent valuethe value today of a payment to be received in the future this is because you can earn interest on a dollar today and have mo re than a dollar in the future used to compare value of different instruments with different timing of paymentsYield to Maturityinterest rate that equates the present value of cash flow payments received with its value today most accurate measure of interest rateRate of returncurrent yieldrate of capital gainReal interest ratenominal interest rateexpected inflation rateTypes of Credit Market Instruments1Simple Loanface value repaid at maturity along with interest paymentSimple interest rateyield to maturity2Fixedpayment Loanloan repaid in equal paymen
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