Chapter 4: The Meaning of Interest Rates

Question 1

Present value

Answer 1

a dollar paid to you one year from now is less valuable than a dollar paid to you today

Question 2

Yield to maturity

Answer 2

the interest rate that equates the present value of cash flow payments received from a debt instrument with its value today

Question 3

What are the four types of credit market instruments?

Answer 3

1. simple loan
2. fixed payment loan
3. coupon bond
4. discount bond

Question 4

Simple loan YTM formula

Answer 4

PV = CF / (1+i)^n

Question 5

Fixed Payment Loan YTM formula

Answer 5

LV = FP/(1+i) + FP/(1+i)^2 + … + FP/(1+i)^n

Question 6

Coupon Bond YTM

Answer 6

P = C/1+i + C/(1+i)^2 + … + C/(1+i)^n + F/(1+i)^n

Question 7

Rate of return formula

Answer 7

RET = C/P_t + (P_t+1 - P_t)/P_t

Question 8

current yield

Answer 8

C/P_t

Question 9

rate of capital gain

Answer 9

(P_t+1 - P_t)/P_t

Question 10

Perpetuity YTM formula

Answer 10

P = C/1+i + C/(1+i)^2 + … = C/i

Question 11

discount bond YTM

Answer 11

P = F/1+i^n

Question 12

Fisher equation

Answer 12

i = r + pi

Question 13

simple loan

Answer 13

pay off at maturity date

Question 14

fixed payment loan

Answer 14

the borrower must repay by making the same payment, consisting of part of the principal and interests, every period, for a set number of years

Question 15

coupon bond

Answer 15

pays a fixed interest payment every year until the maturity date, when a specified final amount is repaid

Question 16

discount bond

Answer 16

bought at a price below its face value and the face value is repaid at the maturity date

Question 17

what is the relationship between interest rates and bonds?

Answer 17

as interest rates increase, bond prices decreases

Question 18

ceteris paribus

Answer 18

with everything else held constant