Present Value:A dollar paid to you one year from now is less valuable than a dollar paid to you today
Four Types of Credit Market Instruments
- Simple Loan
- Fixed Payment Loan
- Coupon Bond
- Discount Bond
Yield to Maturity:The interest rate that equates the present value of cash flow payments received from a debt instrument with its value today
Rate of Return and Interest Rates
The return equals the yield to maturity only if the holding period equals the time to maturity
A rise in interest rates is associated with a fall in bond prices, resulting in a capital loss if time to maturity is longer than the holding period
The more distant a bond’s maturity, the greater the size of the percentage price change associated with an interest-rate change
Real and Nominal Interest Rates
Nominal interest rate makes no allowance for inflation
Real interest rate is adjusted for changes in price level so it more accurately reflects the cost of borrowing
Ex ante real interest rate is adjusted for expected changes in the price level
Ex post real interest rate is adjusted for actual changes in the price level
