ECON 2035 Chapter : Int Rate Definitions Handout Spring 2012

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15 Mar 2019
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Yield-to-maturity (y-t-m): the interest rate that equates the present value of payments made by a financial instrument to its current price. = yearly coupon payment (coupon rate in decimal form x face value) If we know pb, c, f, and n, we can solve for i (y-t-m). Summary: when pb = f, i = coupon rate, when pb < f, i > coupon rate pb and i move inversely, when pb > f, i < coupon rate. Capital gain/loss: difference between the price we pay for an asset like a bond and either the face value if we hold it to maturity or the price we sell it for if we sell before maturity. Consider pb < f which implied that i > coupon rate. If we hold the bond to maturity, we get f but we paid pb which is less than f. thus, we receive a capital gain at maturity.

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