TAMU ECON 311 - Understanding Interest Rates (5 pages)

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Understanding Interest Rates



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Understanding Interest Rates

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Discuss the price of bonds and how they are affected by increase rates.


Lecture number:
4
Pages:
5
Type:
Lecture Note
School:
Texas A&M University
Course:
Econ 311 - Money & Banking

Unformatted text preview:

ECON 311 1nd Edition Lecture 4 Outline of Last Lecture I Interest and Interest Rates II Calculating Interest Rates III Four Credit Market Instruments Outline of Current Lecture I Current Events II Four Credit Market Instruments III Calculating Yield to Maturity IV Bond Prices and Bond Yields V Difference Between Yield to Maturity and Rate of Return VI Real vs Nominal Interest Rates Current Lecture I Current Events a Bank of Japan buying short term Japanese Bonds with a negative interest rate i Japanese government is continuing to do this because they ve made a commitment to continue buying bonds EX If you have to buy either a 5 or 10 interest bond you would buy the 5 because it is a better choice than the 10 However if you can just keep your cash you wouldn t buy either of those bonds Chapter 3 Understanding Interest Rates II Four Credit Market Instruments a Simple Loan no payments till maturity b Discount Bond no payments till maturity c Coupon Bond makes interest payments regularly and pays back the left over interest and the principal at maturity These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute III IV d Fixed Payment Loan pay fixed payments till maturity mixed interest and principal Calculating Yield to Maturity YTM a Simple Loan YTM is the simple interest rate Face Value Present Value b One Year Discount Bond i Present Value C C C F c Coupon Bond P 2 n i 1 i 1 i 1 i 1 n FP FP FP d Fixed Payment Loan LV 2 i 1 i 1 i 1 n i Where P present value C coupon value F face value FP fixed payment LV loan value Bond Prices and Bond Yields EX 1 year discount bond with a face value of 5000 As you lower the bond price more interest is earned on the bond i F P P is the Formula for 1 year bon yield Price Increases as Yield to Maturity decreases 4500 11 1 4650 7 53 4800 4 17 BOND PRICES AND INTEREST RATES ARE NEGATIVELY RELATED V Difference Between Yield to Maturity and Rate of



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