Professional Documents
Culture Documents
II. Interest Rates
II. Interest Rates
Departamento de Economa
INTEREST RATES
Mishkin Cap. 4
Mercado
de
Capitales
D R . I SAI G UIZAR
1. Simple Loan
2. Fixed Payment Loan
3. Coupon Bond
4. Discount Bond
1. Simple Loan
The loan must be paid at maturity along with an additional payment
for the interest
2. Fixed Payment Loan
The loan is repaid by making the same payment every period,
consisting of part of the principal and the interest and interest for a set
number of years
3. Coupon Bond
Pays the owner of the bond a fixed interest payment (at coupon rate)
every year until maturity date, when an specified final amount (face
value or par value) is repaid
4. Discount Bond (zero-coupon bond)
It is bought at a price its face value (at a discount) and the face value is
paid at maturity date
4
Yield to Maturity:
Interest rate that equates todays value with present value of all future
payments
Simple Loan:
The simple interest rate equals the yield to maturity.
Example:
Yield to Maturity:
Interest rate that equates todays value with present value of all future
payments
Example:
Yield to Maturity:
Interest rate that equates todays value with present value of all future
payments
Coupon Bond:
Example:
Coupon Bond:
Note:
When bond is at par, yield equals coupon rate
Price and yield are negatively related
Yield greater than coupon rate when bond price
is below par value
Yield to Maturity:
Interest rate that equates todays value with present value of all future
payments
Discount bond
Similar to a simple bond
Example:
10
11
Banorte offers the same loan to him with no opening fee, instead, the
loan policy includes a fixed monthly payment of $1000. If Juan will
make a decision only based on APRs, should it borrow from banamex
or banorte?
12
13
Interest vs Returns
The rate of return is defined as the payments to the
owner plus the change in its value
Example:
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