ECON-453/Chapter 4 Notes

= Interest Rates =

Variables
$$LV$$ = loan value $$FP$$ = fixed yearly payment n = number of years until maturity

Yield on a Discount Basis
$$ i_{db}=\frac{F-P}{F}\times\frac{360}{n} $$

Rate of Return
$$ RET = \frac{C}{P_t} + \frac{P_{t+1}-P_t}{P_t} $$

$$ P_t = \mbox{price of bond at time} t $$

Examples
$$P$$ = $1200 $$n$$ = 10 years $$c$$ = 10% $$F$$ = $1000

$$ P = ( c / (1 + i) ) + ( c / (1+i)2) 1200 = ( 100 / (1 + i) ) + ( 100 / (1+i)2) $$