tailieunhanh - Lecture Principles of money, banking, and financial markets (12th edition): Chapter 4 - Ritter, Silber, Udell

Chapter 4 - Interest rate measurement and behavior. In this chapter you will learn to describe present value and the mechanics of calculating interest rates, comprehend the different types of bonds and loans and how their structure influences their present value, understand interest rate determination and the supply and demand causes of interest rate fluctuations. | Chapter 4 Interest Rate Measurement and Behavior Copyright © 2009 Pearson Addison-Wesley. All rights reserved. Learning Objectives • Describe present value and the mechanics of calculating interest rates • Comprehend the different types of bonds and loans and how their structure influences their present value • Understand interest rate determination and the supply and demand causes of interest rate fluctuations Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 4-2 Introduction • INTEREST RATES SERVE AS A YARDSTICK FOR COMPARING DIFFERENT TYPES OF SECURITIES AND MATURITIES – Cannot compare amount of total earning between different securities – Must consider the amount of funds in the initial investment to compute the rate of return (interest) on the different securities Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 4-3 1 Calculating Interest Rates • Simple Interest – – – – Interest earned on the principle in one year’s time. Time is worth money A dollar today is worth more than a dollar in the future A dollar due in the future is worth less than a dollar today Interest earned = principal × rate × time (in years) Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 4-4 Calculating Interest Rates (Cont.) • Compound Interest – Interest that accumulates during a year is added to the principal at year’s end, thereby earning more interest in the following year – Banks automatically add interest earned to the principle at specified time intervals – Future Value [FV]—amount today’s principle will be worth in “n” years after adding compounded interest of rate “r”. FV = principle(PV) × (1 + r)n Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 4-5 Calculating Interest Rates (Cont.) • Compound Interest (Cont.) – Present Value [PV]—amount a future sum of money in “n” years will be worth today after discounting back to the present at rate “r” Future value/(1 + r)n = present value Copyright © 2009 Pearson .