EC223 Chapter 4: Chapter 4

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Four types of credit market instruments: a simple loan, a fixed-payment loan, a coupon bond, a discount bond. The distinction among interest rates, rates of returns, and yield to maturity. A dollar deposited today can earn interest and become x (1+i)n. Cf = future cash flow or payments i = interest rate: time line. The interest that equates the present value of cash flow payments received from a debt instrument with its value today. Economists consider it the most accurate measure of interest rate. The returns = yield to maturity only if the holding period equals the time to maturity. A rise in interest rates associated with a fall in bond prices, resulting in a capital loss if time to maturity is longer than the holding period. The more distant a bond"s maturity, the greater the size of percentage price change associated with an interest rate change.

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