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
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Debt Instruments & Interest Rates
Take the perspective of the lender.
Zero coupon bond
Number of coupons remaining?
M06 … M15 19
Asked price of $1 mil of face value?
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?
The rate of discount that equates the present value of future cash flows with the price of the credit instrument.
Recall formula for present value of a consol:
The nominal (actual) interest rate equals the real rate plus the expected inflation rate.
Bonds of same maturity will have different yields because of three factors:
In the 1980s there were 32 AAA rated bonds.Today there are only six: