Post on 20-Jan-2016
transcript
1
Chapter 7Chapter 7Interest Rates and Interest Rates and
Bond PricesBond Prices
© 2000 South-Western College Publishing
2
Time Value ofTime Value of MoneyMoney
The terms on which one can trade off present purchasing power for future purchasing power; the interest rate
3
CompoundingCompounding
A method used to determine the future value of a sum lent today
4
PrincipalPrincipal is... is...
The original amount of funds lent
5
Compounding the Future Value of Money Lent Today
Exhibit 7.1
Payment Today
$1,000
Future Value
$1,060
6
DISCOUNTINGDISCOUNTING
A method used to determine the present value
of a sum to be received in the future
7
PRESENT VALUEPRESENT VALUE
The value today of funds to be received or lent on a future date
8
Value Today$1,000
Future Payment$1,060
Discounting: The Present Value of Money to Be Received in the Future
Exhibit 7.2
9
PAR VALUEPAR VALUE
The face value printed on a bond; the amount the bond originally sold for
10
COUPONCOUPON PAYMENTSPAYMENTS
The periodic payments made to bondholders, which are equal to the principal times the coupon rate
11
DiscountDiscount From ParFrom Par
When a bond sells below its face value because interest rates have increased since the bond was originally issued
12
YIELD TOYIELD TO MATURITYMATURITY
The return on a bond held to maturity, which includes both the interest return and any capital gain or loss
13
Premium AbovePremium Above ParPar
When a bond sells above its face value because interest rates have decreased since the bond was originally issued
14
The demand forThe demand for loanable loanable funds...funds...
The demand for borrowed funds by household, business, government or foreign DSUs
15
$500
E1
Interest Rate
(percent)
Loanable Funds (in billions)
6
Supply
The Supply of and Demand for Funds
Exhibit 7.3
Demand
16
Supply ofSupply of Loanable FundsLoanable Funds
The supply of borrowed funds originating from (1) household, business, government, or foreign SSUs, or (2) the Fed in its provision of reserves in the conduct of monetary policy
17
E1
Interest Rate
(percent)
Loanable Funds (in billions)
6
SS
A Shift in the Demand for Funds
Exhibit 7.4
DDDD
E28
$500 $600
18
Interest Rate
(percent)
Loanable Funds (in billions)
4
SSA Shift in the Supply for Funds
Exhibit 7.5
DD
6
$500 $550
S SE1
E2
19
Nominal Interest RateNominal Interest Rate
The market interest rate, or the real return plus the rate of inflation expected to prevail over the life of the asset
20
Real InterestReal Interest RateRate
The interest rate corrected for changes in the purchasing power of money; the nominal interest rate minus the expected rate of inflation
21
MONEY ILLUSIONMONEY ILLUSION
When spending units react to nominal changes caused by changes in prices, although real variables such as interest rates have not changed
22
INFLATIONINFLATION PREMIUMPREMIUM
The amount of nominal interest added to the real interest rate to compensate the lender for the expected loss in purchasing power that will accompany any inflation
23
Recessions Inflation Rate (percent)6 -month Commercial Paper Rate (percent)
Inflation and Interest RatesP
erce
nt
1960 ’65 ’70 ’75 ’80 ’85 ’90 ’95 20000
5
10
15
Figure 7.6
24
Interest Rate
(percent)
Loanable Funds (in billions)
4
SS
Inflation and Interest Rates: A Graphical Treatment
Exhibit 7.7
DD
10
$500
S S
E1
E2
D D
25
DividendsDividends
Profits distributed to stockholders
26
A consolA consol is... is...
A perpetual bond with no maturity date; the issuer is never obliged to repay the principal but makes coupon payments each year forever