台中央大学货币银行学MBChapter 4.ppt

Chapter 4 Understanding Interest Rates Purposes In this chapter we introduce the yield to maturity, the most accurate measure of interest rates, and alternative less accurate ways in which interest rates are quoted. We also discuss the rate of return of holding bonds, and distinguish between the real and nominal interest rate. Measuring Interest Rates According to the method of repaying the debt and interests, the debt instruments can be classified into four types: simple loan, fixed-payment loan, coupon bond, and discount bond. 1. Simple Loan An amount of funds (principal) that must be repaid to the lender at the maturity date along with an additional amount as an interest payment. 2. Fixed-payment loan An amount of funds that is to be repaid by making the same payment every month, consisting of part of the principal and interest during the lending periods. 3. Coupon bond It pays the owner of the bond a fixed interest payment (coupon payment) every year until the maturity date, when a specified final amount (face value or par value) is repaid. A Coupon bond specifies three elements: issuer, maturity date, and coupon rate. 4. Discount bond (zero-coupon bond) a bond bought at a price below its face value, and the face value is repaid at the maturity date. These four types of instruments require payments at different times. So their present values of future payments will be different too. How to compare these four types of instruments in terms of their interest rates? Present Value Present value is based on the notion that a dollar paid to you in the future is less valuable to you than a dollar paid to you today. The actual values of the payments paid at different dates in the future should be compared by their present values. Yield to Maturity Yield to maturity is the interest rate that equates the present value of payments received from a debt instrument with its value today. Yield to maturity is the most accurate measure of interest rates. Si