Chapter 03_What Do Interest Rates Mean and What Is Their Role in Valuation?

Part Two Fundamentals of Financial Markets

Chapter 3 What Do Interest Rates Mean and What Is Their Role in Valuation?

Chapter Preview ,[object Object]

Chapter Preview ,[object Object],[object Object],[object Object],[object Object]

Present Value Introduction ,[object Object],[object Object],[object Object]

Present Value ,[object Object],[object Object]

Present Value Applications ,[object Object],[object Object],[object Object],[object Object],[object Object]

Present Value Concept: Simple Loan Terms ,[object Object],[object Object],[object Object],[object Object]

Present Value Concept: Simple Loan

Present Value Concept: Simple Loan (cont.) ,[object Object]

Yield to Maturity: Loans ,[object Object],[object Object]

Present Value of Cash Flows: Example

Present Value Concept: Fixed-Payment Loan Terms ,[object Object],[object Object]

Present Value Concept: Fixed-Payment Loan Terms ,[object Object]

Yield to Maturity: Loans ,[object Object]

Yield to Maturity: Bonds ,[object Object],[object Object]

Yield to Maturity: Bonds ,[object Object]

Relationship Between Price and Yield to Maturity ,[object Object],[object Object],[object Object],[object Object]

Relationship Between Price and Yield to Maturity ,[object Object]

Current Yield ,[object Object],[object Object],[object Object]

Yield on a Discount Basis ,[object Object],[object Object],[object Object],[object Object]

Global perspective ,[object Object],[object Object]

Distinction Between Real and Nominal Interest Rates ,[object Object],[object Object],[object Object],[object Object]

Distinction Between Real and Nominal Interest Rates ,[object Object],We usually refer to this rate as the ex ante real rate of interest because it is adjusted for the expected level of inflation. After the fact, we can calculate the ex post real rate based on the observed level of inflation.

Distinction Between Real and Nominal Interest Rates (cont.) ,[object Object],[object Object]

U.S. Real and Nominal Interest Rates Sample of current rates and indexes http://www.martincapital.com/charts.htm

Distinction Between Interest Rates and Returns ,[object Object],where = current yield, and = capital gains.

Key Facts about the Relationship Between Rates and Returns Sample of current coupon rates and yields on government bonds http://www.bloomberg.com/markets/iyc.html

Maturity and the Volatility of Bond Returns ,[object Object],[object Object],[object Object],[object Object]

Maturity and the Volatility of Bond Returns (cont.) ,[object Object],[object Object],[object Object]

Reinvestment Risk ,[object Object],[object Object],[object Object]

Calculating Duration i =10%, 10-Year 10% Coupon Bond

Calculating Duration i = 20%, 10-Year 10% Coupon Bond

Formula for Duration ,[object Object],[object Object],[object Object]

Formula for Duration ,[object Object],[object Object]

Duration and Interest-Rate Risk ,[object Object],[object Object]

Duration and Interest-Rate Risk (cont.) ,[object Object],[object Object]

[object Object],[object Object],Duration and Interest-Rate Risk (cont.)

Chapter Summary ,[object Object],[object Object]

Chapter Summary (cont.) ,[object Object]

Chapter 03_What Do Interest Rates Mean and What Is Their Role in Valuation?

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Chapter 03_What Do Interest Rates Mean and What Is Their Role in Valuation?