M&B WEEK 3 NOTES
M&B WEEK 3 NOTES Econ 3303-001
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This 0 page Class Notes was uploaded by IHUOMA ECHENDU on Friday February 12, 2016. The Class Notes belongs to Econ 3303-001 at University of Texas at Arlington taught by kathy kelly in Winter 2016. Since its upload, it has received 29 views. For similar materials see money and banking in Economcs at University of Texas at Arlington.
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Date Created: 02/12/16
Chapter 4 understanding interest rates Bond market chapter NOTE THESE NOTES CONTAIN EXPLANATIONS FROM CLASS THIS CHAPTER DEALS WITH A LOT OF DEFINITIONS WHICH COULD BE FOUND IN THE TEXTBOOK AND ON THE CHAPTER NOTES IN BLACKBOARD A dollar today is more valuable than one tomorrow Why Because it can be saved and invested gt The longer the time period to save for the future the smaller the present value Higher interest rates the lower the present value Simple loan onetime payment loan Fixed payment loan 6 g car payment continuous payment until the maturity date Coupon rate is set the first time a bond is sold in a primary market It never changes once it s set What might change is the price one is Willing to pay Unlike interest rate coupon rate is fixed FOCUS ON DEFINITIONS AND CONCEPTS IN THIS CHAPTER NOT FORMULAS Discount bond no periodic payments Pay less than face value and receive face value on the maturity date Yield to maturity holding till maturity date You must collect final payment for an amount to be your interest earned for holding on to it for that time period When you pay face value for a bond your yield to maturity and coupon rate are the same Price and yield to maturity are inversely related FPd Lofdays Discount bond formula i Pd maturity z r INTEREST RATE RISK 0 All bonds have interest rate risk including the US treasury bonds 0 US treasury are default risk free But aren t totally risk free because they have interest rate risk 0 One could suffer a loss if sold before maturity date 0 Note volatile means uncertain unsure changes 0 All kinds of risk require compensation 0 If interest rates decline one should rather be holding a LONG TERM 0 Nominal interest rates are stated on your loan contract They do not drive the borrowing and lending 0 Real interest rates drive the borrowing and lending in the economy 0 Fisher equation i r H quote OR r i H quote
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