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The Meaning of i
Transcript of The Meaning of i
Time has Value
Present Value vs. Future Value
Present Value: the amount of money today that would be needed, using prevailing interest rates to produce a given future amount of money
…Interest rates link the present to the future, allow us to compare the payment made on different dates, tell us the future reward for lending today, as well as the cost of borrowing now and repaying later….
When to get/pay the money matters
$590.5 m over 30 years payout spread
$370.9 m lump sum cash
Future Value, Present Value and Net Present Value
Future Value: The amount of money in the future that an amount of money today will yield, given prevailing interest rates
The ability of an asset to generate earnings, which are then reinvested in order to generate their own earnings. In other words, compounding refers to generating earnings from previous earnings.
Discounted Cash Flow Model
APR VS. EAR
Don's trust quoted interest rate from the bank!
APR VS. EAR
Fixed Payment Loan / Annuities
Discount Bond (Premium Bond)
the lender provides the borrower with an amount of funds that must be repaid to the lender at the maturity date, along with an additional payment for the interest
Fixed Payment Loan
A fixed-payment loan (also called a fully amortized loan) in which the lender provides the borrower with an amount of funds that the borrower must repay by making the same payment, consisting of part of the principal and interest, every period (such as a month) for a set number of years.
A coupon bond pays the owner of the bond a fixed interest payment (coupon payment) every year until the maturity date, when a specified final amount (face value or par value) is repaid
A discount bond (also called a zero-coupon bond) is bought at a price below its face value (at a discount), and the face value is repaid at the maturity date.
An annuity is a stream of equal cash flows that occurs at equal intervals over a given period.
(Zero-coupon Bond, Consols)
the interest rate that equates the present value of cash flow payments received from a debt instrument with its value today
Yield to maturity
How does a bond's coupon interest rate affect its price?
When Coupon Rate < Yield to Maturity,
Bond Price < Par Value (Face Value)
Bond is selling at Discount
When Coupon Rate > Yield to Maturity,
Bond Price > Par Value (Face Value)
Bond is selling at Premium
When Coupon Rate = Yield to Maturity
Bond Price = Par