1 / 18

Chapter 5: Learning Objectives

Chapter 5: Learning Objectives. What is the Interest Rate? Different Interest Rate Measures: from YTM to STRIPS Nominal vs. Real Interest Rates Interest Rates and Taxes. Payment Schemes. Simple loan : one payment at maturity Fixed payment loan : payments at fixed intervals

shoshana-herrera
Télécharger la présentation

Chapter 5: Learning Objectives

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Chapter 5:Learning Objectives • What is the Interest Rate? • Different Interest Rate Measures: • from YTM to STRIPS • Nominal vs. Real Interest Rates • Interest Rates and Taxes

  2. Payment Schemes • Simple loan: one payment at maturity • Fixed payment loan: payments at fixed intervals • Coupon bond: fixed payouts & principal repayment • Discounted bonds: Treasury bill • STRIPS: Separate Trading of Registered Principal & Interest of Securities

  3. The Basic Present Value Principle $X $100 t t+1 Present Value Future Value

  4. 2006 Present Value of $100

  5. The Coupon Bond PV = [$C/(1+R)] + …+ [$C/(1+R)n] + [$FV/(1+R)n] $C $FV $C $C R R R t+n t+n-1 t t+1

  6. Bond Prices and Interest Rates

  7. Discounted Bills: The Treasury Bill R = [($FV - $PD)/$PD]X (360/90) Maturity period $PD $FV

  8. Current Yield R = $C/Pt + Pt/Pt Current Yield = one-period return + Capital gain/loss $C Pt Pt+1

  9. STRIPS Investors wanting a lump-sum payment will prefer option I I $FV Pt Pt (1 + R)n = FV $C $C $C $C II $C=% FV Investors wanting regular payments will want Option II

  10. Internal Rate of Return $NF0={$NF1/(1+R)}+ {$NF1/(1+R)2}+…+{$NFn/(1+R)n} NF1 Initial Outlay of $NF0 t=0 NFn Cash flows over n periods

  11. Nominal vs. Real Interest Rates e e e Ex ante    t+1 t+3 t+2 Ex post R R=+e R=+ Nominal Interest rate fixed

  12. Nominal Interest Rate and Inflation

  13. Real Interest Rates in Canada

  14. Inflation and Nominal Interest RatesAcross Countries: 1980-2003

  15. Financial Focus 5.2: Real Return Bonds

  16. How the Real return bond works: An Example • Reference vs Actual Date • Need to interpolate because CPI is available monthly with a lag • Purchase date: 20 JAN 2003; Selling date: 20 July 2003 (= 6 month holding period) • Reference date is: 20 April 2003 • CPI 20 July 2003= (130.1 [CPI 30/4/03] * (20/31=interpolation period) + 129.9 [CPI 31/3/03])= 130.03 • Inflation during holding period is: (130.03-126.64)/126.64=2.68%

  17. How the Real return bond works: An Example • Amounts received for a $100,000 real return bond held for 6 months: • compensation for inflation: $100,000*1.0268= $102,677.94 • Compensation for real return: $102,677.94*.02125 (1/2 of 4.25% real return) = $2181.91 • TOTAL: $102,677.94+ $2181.91 = $104,859.83

  18. Summary • Debt is like a futures contract • The “price” of debt is the “interest rate” • The PV of a stream of payments is discounted by the interest rate until the term to maturity • The key mathematical relations are: • Xt = X0 / (1+R)n • PVt = [$C/(1+R)] + … + [$C/(1+R)n)] + [$FV/(1+R)n] • R = ($FV - $PD)/ $PD X (360/90) • Rct = C/ Pt • Fisher equation: R =  + 

More Related