Money banking
Download
1 / 25

Money & Banking - PowerPoint PPT Presentation

Money & Banking Week 4 Debt Instruments & Interest Rates Draw cash flow diagrams for the four types of credit instruments. Take the perspective of the lender. Simple loan Annuity/Amortized loan Coupon bond Zero coupon bond Bond Page of the Newspaper

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha

Download Presentationdownload

Money & Banking

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.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -

Presentation Transcript


Money banking l.jpg

Money & Banking

Week 4

Debt Instruments & Interest Rates


Draw cash flow diagrams for the four types of credit instruments l.jpg

Draw cash flow diagrams for the four types of credit instruments.

Take the perspective of the lender.

Simple loan

Annuity/Amortized loan

Coupon bond

Zero coupon bond


Bond page of the newspaper l.jpg

Bond Page of the Newspaper


Slide4 l.jpg

Semi annual coupon on $1 mil of face value?

$66,250.00

Number of coupons remaining?

M06 … M15 19

Asked price of $1 mil of face value?

$1,430,625


Pricing a coupon bond l.jpg

Pricing a coupon bond

Suppose I need a 4% rate of return.

How much would I be willing to pay for $1 million of face value of the bond on the previous slide?

  • Calculate the PV of face value (FV=1mil, n=19, i = .02)

  • Calculate the PV of coupons using annuity table. (PMT = 66,250, n=19, i = .02)

  • Add two parts together.


Yield to maturity l.jpg

Yield to Maturity

The rate of discount that equates the present value of future cash flows with the price of the credit instrument.


Relationship between price and yield to maturity l.jpg

Relationship Between Price and Yield to Maturity

.


Calculate the yield to maturity on a consol that pays 100 a year and is priced at 2 500 l.jpg

Calculate the yield to maturity on a consol that pays $100 a year and is priced at $2,500.

Recall formula for present value of a consol:


Approximation for ytm current yield l.jpg

Approximation for YTM: Current Yield


Fisher equation l.jpg

Fisher Equation

The nominal (actual) interest rate equals the real rate plus the expected inflation rate.


Tips treasury inflation protection securities l.jpg

TIPS (Treasury Inflation Protection Securities)

  • Originally issued in 1997.

  • Interest and principal payments are adjusted for inflation.

  • In times of high inflation the $ amount paid to investors rises.

  • Return on TIPS provides information on expected inflation.


U s real and nominal interest rates l.jpg

U.S. Real and Nominal Interest Rates


Money market instruments l.jpg

Money Market Instruments

  • Debt instruments

  • Short-term (year or less)

  • Low risk

  • High denomination

  • Also known as “cash”

  • Examples: Treasury bills, commercial paper, bankers acceptances, repurchase agreements, CD’s


Chapter six l.jpg

Chapter Six

Interest Rates:

  • Risk Structure

  • Term Structure


Risk structure of interest rates l.jpg

Risk Structure of Interest Rates

Bonds of same maturity will have different yields because of three factors:

  • Default risk

  • Liquidity

  • Tax considerations


Risk structure of long term bonds in the united states l.jpg

Risk Structure of Long-Term Bonds in the United States


Rating bonds l.jpg

Rating Bonds


Bond ratings l.jpg

Bond Ratings


Highest rated corporate bonds l.jpg

Highest Rated Corporate Bonds

In the 1980s there were 32 AAA rated bonds.Today there are only six:

  • Automatic Data Processing

  • Exxon Mobil

  • General Electric

  • Johnson & Johnson

  • Pfizer

  • United Parcel Post


History of junk bonds l.jpg

History of Junk Bonds

  • Fallen Angels

  • Michael Milken


Yield curve last year at this time l.jpg

yield curve last year at this time


Yield curve last week l.jpg

yield curve last week


Theories of term structure shape of yield curve l.jpg

Theories of Term Structure (shape of yield curve)

  • Expectations Hypothesis

  • Segmented Markets

  • Liquidity Premium (preferred habitat)


Interest rates on different maturity bonds move together l.jpg

Interest Rates on Different Maturity Bonds Move Together


Relationship between the liquidity premium preferred habitat and expectations theories l.jpg

Relationship Between the Liquidity Premium (Preferred Habitat) and Expectations Theories


ad
  • Login