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Chapter 4
The Meaning of
Interest Rates
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Future Value of a Lump Sum Payment used to calculate the future balance in a
savings account or at maturity of a CD.
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4-6
Some definitions
Am ount
$10,000.00
Interest Rate
Paym ent
$443.21
6.00%
M onths
24
Interest
Principal
Beginning Balance
$10,000.00
$50.00
$393.21
$9,606.79
$48.03
$395.18
$9,211.61
$46.06
$397.15
$8,814.46
$44.07
$399.14
$8,415.32
$42.08
$401.13
$8,014.19
$40.07
$403.14
$7,611.05
$38.06
$405.15
$7,205.90
$36.03
$407.18
$6,798.72
$33.99
$409.22
$6,389.50
10
$31.95
$411.26
$5,978.24
11
$29.89
$413.32
$5,564.92
12
$27.82
$415.39
$5,149.53
13
$25.75
$417.46
$4,732.07
14
$23.66
$419.55
$4,312.52
15
$21.56
$421.65
$3,890.87
16
$19.45
$423.76
$3,467.12
17
$17.34
$425.87
$3,041.24
18
$15.21
$428.00
$2,613.24
19
$13.07
$430.14
$2,183.10
20
$10.92
$432.29
$1,750.80
21
$8.75
$434.46
$1,316.35
22
$6.58
$436.63
$879.72
23
$4.40
$438.81
$440.91
24
$2.20
$440.91
$-
$636.94
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Some definitions
Some Definitions
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Some definitions
Par the bond is selling for its Face Value
CUSIP number Committee on Uniform
Security Identification Procedures.
All securities have a CUSIP number, but a
stock is typically identified by its ticker
symbol (E.g., Trustmarks is TRMK)
Everything other than stocks are identified
by their CUSIP number.
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Yield to Maturity
Yield to maturity: the interest rate that
equates the present value of cash flow
payments received from a debt instrument
with its value today
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Coupon Bond
When the coupon bond is priced at its face value,
the yield to maturity equals the coupon rate.
The price of a coupon bond and the yield to
maturity are negatively related.
The yield to maturity is greater than the coupon
rate when the bond price is below its face value.
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Sources: Nominal rates from Federal Reserve Bank of St. Louis FRED database: http://research.stlouisfed.org/fred2/. The real rate is
constructed using the procedure outlined in Frederic S. Mishkin, The Real Interest Rate: An Empirical Investigation, CarnegieRochester Conference Series on Public Policy 15 (1981): 151200. This procedure involves estimating expected inflation as a function
of past interest rates, inflation, and time trends, and then subtracting the expected inflation measure from the nominal interest rate.
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