Understanding interest rate
18 important questions on Understanding interest rate
Explain the concept of the present value?
What is a simple loan?
How is the simple interest rate calculated?
e.g. 10/100= 0.10= 10% ßinterest
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What is discounting the future and how is it calculated?
PV= CF / (1 + i) ^ n
(with PV as present future and CF as future cash flow, PV also the principal)
What are the four types of market instruments?
2. fixed-payment loan
3. coupon bond
4. discount bond or zero-coupon bond
What is a fixed-payment loan?
What is a coupon bond?
What is a coupon bond rate?
What is a discount bond?
What is yield to maturity?
How is the yield to maturity calculated on a simple loan?
100=110/ (1 + i) ^n
(1+ i)100= 110
(1+i) = 110/100
I = 1.10 - 1 = 0.10 = 10%
How can a fixed-payment loan be calculated?
How can a coupon bond be calculated?
What are three interesting facts about coupon bonds?
- When the coupon is priced at its face value, the yield to maturity equals the coupon rate
- The price of a coupon bond and the yield to maturity are negatively related.
- The yield to maturity is greater than the coupon bond rate when the bond price is below its face value.
What is a consol or perpetuity bond?
How can the YTM be calculated on a discount bond?
F= face value of the discount bond, P = current price of the discount bond
What is the rate of return?
Name the 5 facts that are true about bonds
- longer maturity --> larger price changes
- longer maturity --> lower rate of return
- longer maturity --> higher risk
- rate of return can be become negative
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