EC 303 - Interest Rates Notes

EC 303 - JSU - Interest Rates Notes

present value

The concept of ____________ tells us why one dollar paid to you today is more more than one dollar paid a year from now.

present value

The current value that one will receive from a financial instrument that provides income over time.

principal

The original amount received from a loan is known as the _______.

maturity date

The date on which the principal is due is known as the _________.

Present value

___________ allows us to compare different financial instruments that have different cash flows and/or maturity dates.

simple

The ______ loan is one type of credit market instrument.

fixed payment

A ________ loan is when the borrower makes payments of principal plus interest at regular intervals until for a set amount of time.

fixed payment

A car loan and home loan is an example of a ________ loan.

coupon bond

Borrower pays the lender a fixed “coupon” payment every period until the maturity date, when it receives the face value, or par value.

discount bond

Lender purchases the bond below face value, but receives the face value at maturity

True

True or False:
A coupon bond can be sold at a discount.

Yield to Maturity (YTM)

The discount rate that equates the value of future cash flows from the instrument with its current value

Perpetual Bond

This type of bond pays a coupon rate, but has no maturity date.

inversely

Bond prices and yield to maturity are ________ related.

capital gain

The __________ is the change in the bond’s price relative to its current price.

volatile

Prices and returns for long-term bonds are more ______ than those for shorter-term bonds.

interest rate

Long-term bonds face what is called _________ risk.

maturity

The longer time to _______ is the longer time it takes to assess the risks to bonds prices.

real return

As a lender, unexpected inflation erodes your ____________.

lower

As a borrower, the real rate that you will have to pay back is ________ if inflation is higher.

ex ante real interest rate

adjusted for the expected inflation rate.

ex post real interest rate

adjusted for the actual inflation rate

real

The ______ interest rate is a better measure when borrowing money because it doesn’t fluctuate with changes in the price level.

i = ir + πe

What is the Fisher Equation?

low; fewer

When the real interest rate is _____, there are greater incentives to borrow and _____ incentives to lend.

real

The _______ interest rate is a better indicator of the incentives to borrow and lend.