BA 580 – Interest Rates. Why They Exist; Link with Decisions; Key Facts & Formulas. Why Interest?. Personal Values of Present v. Future “Rate of Time Preference” Data from National Long. Study of Youth Present v. Future Production Capability
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Why They Exist; Link with Decisions; Key Facts & Formulas
C = interest original issuer promises to pay (coupon rate)
B = face value of bond if held to maturity (par value)
P = usually quoted as % of face value (e.g. 99 = 99%)
100 = 5/(1+r) + 100/(1+r) = (105)/(1+r); r = 0.05 = 5%
If P = 95, then r = 10.5%