Ch 4 Interest Rate
Ch 4 Interest Rate ECON 3303
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This 3 page Class Notes was uploaded by Ashlie Meckley on Monday September 28, 2015. The Class Notes belongs to ECON 3303 at University of Texas at Arlington taught by Chi-Young Choi in Summer 2015. Since its upload, it has received 117 views.
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Date Created: 09/28/15
Ch 4 Interest Ra Lecture Dates September 15th17th 0 Present Vale I 1 today has a different value tomorrow I 1 today is worth more than a 1 in the future 0 Amount invested today for future payment I Future Value Money X 1 in I Present Value Money 1 In 0 i intrest rate 0 n number of years 0 EX suppose that you have 10000 today and your bank pays 5 interest rate for your savings account what will you have next year two years from now and three years from now INext year 10000 X 1 51 10500 ITwo years 10000 X 1 52 11025 IThree years 10000 X 1 53 11576 0 EX Which of the following would you like to receive at 10 interest rate aL75 one year from now 75 111 6818 bL85 two year from now 85 1 12 7025 QL9O three year from now 90 1 13 6762 0 Borrowing and Lending 0 Borrowing cost on a loan aLWant interest lower b More Productivebarrowers viewpointuse of money 0 Lenders reward on the investment return a Want interest higher b Time Preferencelenders viewpoint You want money now not later 0 Interest rate low aLGreater incentive to borrow b Fewer incentive to lend I Whv are interest rates important 1Affects investments and consumption 2Redistributes wealth between borrowers and lenders 3Impacts prices of key financial assets such as stocks and bonds 0 Investment purchase of new capital goods and additions to inventories 0 Internet Cafe Example aLHow many computers should you buy Revenue Cost 1 Cost 1 7 8 Computer 100 70 80 1 Computer 2 90 70 80 Computer 3 80 70 80 Computer 4 70 70 80 1 Firms investment decreases when interest rate increases 2 Profit revenu 0 Yield to Maturity 0 Interest rate equates payments received from a debt instrument with its value today 0 Most accurate measure of interest Rate 0 Debt instruments 0 Loans a Simple e cost Loans 0 one payment b Fixed Pavment Loans 0 More than one payment same payment every period throughout the life of the loan 0 Fixed Davment 0 Bonds a Discount Bond zerocoupon bond Bought at a price below its face value which is repaid at the 0 price lower than face value means no interest 11n maturity date single payment Face Value Price paid b Coupon Bond 0 Consol perpetuity 0 Perpetual bond with no maturity date and no payment of principal that makes fixed coupon payments of C forever aLPrice consol PC cl i11i2 bLCurrent Yield Ic 0 Rate of Return c Pc Multiple payments 0 Payments to the owner plus the change in value expressed as a fraction of the purchase price 39RET Q P1t Pt Pt Pt 0 Pt price of bond at time 0 P H price of bond at tl 0 C coupon payment 0 CPt current yield i 0P1t Pt Pt rate of capital gain g 0 rate of return yield to maturity aLif the holding period equals the time to maturity 0 interest rate rises 0 bond price decreases 0 capital loss if sold before the maturity 0 rate of return lt yield to maturity 0 Real Interest Rate 0 Interest rate that is adjusted for expected changes in the price level so that it re ects more accurately the true cost of borrowing or true reward of lending aLex post real interest rate r 0 i realized in ation rate hLex ante real interest rate re 0 i expected in ation rate 0 Fisher Equation 0 Real interest rate Nominal IR Expected in ation 0 Federal Open Market Committee gFOMC 0 Believe change in interest rate may change a Interest Rate increases 0 Sensitive stock market 0 Bad news 0 Bond price decrease I People buy more bonds less stock httosstudvsouocomuniversitvoftexasatarlinqtonecon3303oneweekof notesch4interestrateid47545
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