Interest Rates Flashcards
(19 cards)
Who provides the money and and who receives the money
Giver = lender
Receiver = borrower
When must the bond be paid
Maturity date
Future value =
Initial cash * (1+i)^n
Present value =
Cash flow / (1+i)^n
Coupon bond does what
Pays the owner of the bond a fixed interest payment every year until the maturity date plus a final specified amount
Perpetuity bond
Bond with no maturity date
discount bond
Bought at a price below its face value and the face value is repaid at maturity date
What is unique about discount bond
No interest payments
Price off bond
Face value / (1+i)^n
I is yield to maturity
What is relationship between current bond prices and interest rates
Negatively related
Real interest rate
Interest rate that has been adjusted by subtracting changes in price level due to inflation
Nominal interest rate the
The percentage rate at which the nominal value of an interest bearing asset changes over time
Real asset value in t =
Nominal asset value in t / price level in t
If z = x*y
%chnage in z = %change in x + %change in y
If w = x / y
Then %change in w = %change in x - %change in y
Real interest rate =
nominal interest rate - inflation rate
When real interest rate is positive what is the case
Greater incentives to lend and lower incentives to borrow
When real interest rates are negative
Greater incentive to borrow and less incentives to lend
Real interest after tax
= i(1-t) - inflation rate
T is tax income rate
