62金融市场3understand interest rate

3-1uUNDERSTANDINGINTERESTRATESChapter3uBEHAVIOROFINTERESTRATESChapter4uTHERISKANDTERMSTRUCTUREOFINTERESTRATESChapter5uTHETHEORYOFEFFICIENTCAPITALMARKETSChapter6PartIIPrinciplesofFinancialMarketsSchoolofManagementinHUST3-2Obviously,$10,000today.YoualreadyrecognizethatthereisTIMEVALUETOMONEY!!TheTimeValueofMoneyandTheInterestRateTheTimeValueofMoneyandTheInterestRateWhichwouldyouprefer--$10,000todayor$10,000in5years?SchoolofManagementinHUST3-3TIMEallowsyoutheopportunitytopostponeconsumptionandearnINTEREST.WhyTIME?WhyTIME?WhyisTIMEsuchanimportantelementinyourdecision?SchoolofManagementinHUST3-4050001000015000200001stYear10thYear20thYear30thYearFutureValueofaSingle$1,000Deposit10%SimpleInterest7%CompoundInterest10%CompoundInterestWhyCompoundInterest?WhyCompoundInterest?FutureValue(U.S.Dollars)Millionaireexampleofcompoundinterestusing.aviSchoolofManagementinHUST3-5RelationbetweenInterestRatesandPresentandFutureValuesFutureValue(FV)InterestRatePresentValue(PV)InterestRatemTnmrPVFV)1(+=SchoolofManagementinHUST3-6uFutureValueisthevalueatsomefuturetimeofapresentamountofmoney,oraseriesofpayments,evaluatedatagiveninterestrate.PresentValueisthecurrentvalueofafutureamountofmoney,oraseriesofpayments,evaluatedatagiveninterestrate.SchoolofManagementinHUST3-7ChapterThreeUNDERSTANDINGINTERESTRATESPartIIPrinciplesofFinancialMarketsSchoolofManagementinHUST3-8uSupposeabondcurrentlysellsfor$932.90.Itpaysanannualcouponof$70,anditmaturesin10years.Ithasafacevalueof$1000.uAndifyousellitfor$948.70afterayear,Whatreturnwasearnedoverthepastyear?uWhatareitscouponrate,currentyield,andyieldtomaturity(YTM)?SolutionSchoolofManagementinHUST3-9ChapterOutline1.MeasuringInterestRates2.TheDistinctionBetweenRealandNominalInterestRateandReturn3.TheDistinctionBetweenInterestRateandReturnSchoolofManagementinHUST3-10u1.SimpleLoanuWhichprovidestheborrowerwithanamountoffunds(principal)thatmustberepaidtothelenderatthematuritydatealongwithanadditionalamountknownasinterestpayment.u2.FixedPaymentLoanuWhichprovidestheborrowerwithanamountoffundsthatmustberepaidbymakingthesamepaymenteverymonth,consistingofpartoftheprincipalandinterestforasetnumberofyears.FourTypesofCreditInstrumentsSchoolofManagementinHUST3-11u3.CouponBonduWhichpaystheownerofthebondafixedpayment(couponpayment)everyyearuntilthematuritydate,whenaspecifiedfinalamount(facevalueorparvalue)isrepaid.u4.DiscountBond(zero-couponBond)uWhichisboughtatapricebelowitsfacevalue(atadiscount),andthefacevalueisrepaidatthematuritydate.FourTypesofCreditInstrumentsSchoolofManagementinHUST3-12YieldtoMaturity:Loansu1.SimpleLoan(100$,ayear,110$)u$100=$110/(1+i)⇒ui=$110-$100=$10=.10=10%u$100$100SchoolofManagementinHUST3-13YieldtoMaturity:LoansuYieldtomaturity=interestratethatequatestoday'svaluewithpresentvalueofallfuturepayments()()()()∑=+=++++++++=ntttnnyCFyCFyCFyCFyCFP133221011111LP0CFttnySchoolofManagementinHUST3-14YieldtoMaturity:Loansu2.FixedPaymentLoanExampleu(1000$,126$paymentyealy,25years)uy121000)1(126)1(126)1(12611262532=++++++++=yyyyPVLSchoolofManagementinHUST3-15YieldtoMaturity:Bondsu3.CouponBond(1000$,Couponrate=10%=C/F,10years)1000)1(1000)1(100)1(100)1(10011001010320=++++++++++=yyyyyPLnnyFyCyCyCyCP)1()1()1()1(1320++++++++++=LSchoolofManagementinHUST3-16RelationshipBetweenPriceandYieldtoMaturityuParBonduYieldtomaturity=couponrateuDiscountBonduYieldtomaturitycouponrateuPremiumBonduYieldtomaturitycouponrateSchoolofManagementinHUST3-17u4.One-yearDiscountBond(P=$900,F=$1000)u$900=$1000⇒u(1+i)ui=$1000-$900=.111=11.1%u$900ui=F-PuPYieldtoMaturity:BondsSchoolofManagementinHUST3-18SchoolofManagementinHUST3-19u12uReinvestmentRiskSchoolofManagementinHUST3-20BondPageoftheNewspaper(Teamwork)SchoolofManagementinHUST3-21CurrentYielduic=CuPuC-yearlycouponpayment;p-priceofthecouponbonduTwoCharacteristicsu1.Isbetterapproximationtoyieldtomaturity,nearerpriceistoparandlongerismaturityofbondu2.ChangeincurrentyieldalwayssignalschangeinsamedirectionasyieldtomaturitySchoolofManagementinHUST3-22YieldonaDiscountBasis(DiscountYields)maturity)todaysof(number360xFP)-Fidb(=uOne-yearbill,P=$900,F=$10009.9%.099365360x$1000$900-$1000idb===SchoolofManagementinHUST3-23uTwoCharacteristicsu1.Understatesyieldtomaturity;longerthematurity,greaterisunderstatementu2.ChangeindiscountyieldalwayssignalschangeinsamedirectionasyieldtomaturityYieldonaDiscountBasisSchoolofManagementinHUST3-24u1.Thecouponrate(orjust“coupon”)istheannualdollarcouponexpressedasapercentageofthefacevalue:Couponrate=$70/$1000=7%u2.Thecurrentyieldistheannualcoupondividedbythecurrentmarketpriceofthebond:Currentyield=$70/932.90$=7.5%SolutionSchoolofManagementinHUST3-25u3.Theyieldtomaturity(or“YTM”)istheratethatmakesthepriceofthebondjustequaltothepresentvalueofitsfuturecashflows.Itistheunknownrin:)1()1(1010110007090.932rrtt+++=∑=SolutionSchoolofManagementinHUST3-26uReturn---Incomereceivedonaninvestmentplusanychangeinmarketprice,usuallyexpressedasapercentofthebeginningmarketpriceoftheinvestment.uReturn---Incomereceivedonaninvestmentplusanychangeinmarketprice,usuallyexpressedasaper