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Chapter 4 Interest Rates
Chapter Objectives
By the end of this chapter, students should be able to:
- Define interest and explain its importance.
- Write and explain the present value formula.
- Write and explain the future value formula.
- Calculate present and future value for multiple periods with annual and more frequent compounding.
- Define and price major types of debt instruments including discount bonds, simple loans, fixed payment loans, coupon bonds, and perpetuities.
- Define yield to maturity and identify the types of financial instruments for which it is relatively easy to calculate.
- Explain why bond prices move inversely to market interest rates.
- Explain why some bond prices are more volatile than others.
- Define rate of return and explain how it differs from yield to maturity.
- Explain the difference between real and nominal interest rates.