Finance I – Summary II
Midterm II
Chapter 5
Bond = Tradeable loan with a time-to-maturity longer than 1 year
time-to-maturity = the time until the last promised cashflow is received by the issuer
Issuer = governments and corporations that issue bonds to raise money from
investors today in exchange for a promised payment in the future
fixed time-to-maturity
fixed cashflow stream ¿ coupon+ principal
Coupon = interest payment on the bond
Principal = the initial price of bond, can be payed back in 3 ways.
o Bullet = all at once at maturity
o Annuity = each period an amount
o Never
T
CF t
P=∑
t =1 (1+ r t )t
P = Value of a bond (Price)
T = time-to-maturity
t = the year you get a certain cashflow
if coupon rate = required rate P = Face Value
if coupon rate > required rate P > Face Value
if coupon rate < required rate P < Face Value
, T
CF t
P=∑
t =1 (1+ y)t
y (YTM )=¿ Yield to maturity = percentage
y t =¿ interest rate of t, if coupon = 0
If P > face value, then yield to maturity < coupon rate
If P < face value, then yield to maturity > coupon rate
If P = face value, then yield to maturity = coupon rate
(1+r t )t
1+ ¿t −1 f t= t −1
¿
(1+ r t−1)
f =¿ forward rate
n=¿ the current year
.t −1 f t=E ¿ ¿ )
E( ¿t−1 r t )=¿ ¿ Expected value of r one year later = expectations theory
.t −1 f t=E (¿t −1 r t )+ L1 ,t ¿
Liquidity preference theory = Investors prefer short term investments because of
uncertainty of inflation, issuers prefer long term loan because it reduces their
interest rate risk. To get longer loans, issuers offer a positive liquidity premium.
L1 ,t = Liquidity premium
Market segmentation theory = The market is divided in different segments each containing
suppliers and demanders of capital with their own maturity preference. Suppliers and
demanders are not prepared to leave their segment. Interest rate in different segments
are not related to each other.
t
D=∑ weight of PV t∗t
t =1
D=¿ Duration = yield elasticity of the price
Midterm II
Chapter 5
Bond = Tradeable loan with a time-to-maturity longer than 1 year
time-to-maturity = the time until the last promised cashflow is received by the issuer
Issuer = governments and corporations that issue bonds to raise money from
investors today in exchange for a promised payment in the future
fixed time-to-maturity
fixed cashflow stream ¿ coupon+ principal
Coupon = interest payment on the bond
Principal = the initial price of bond, can be payed back in 3 ways.
o Bullet = all at once at maturity
o Annuity = each period an amount
o Never
T
CF t
P=∑
t =1 (1+ r t )t
P = Value of a bond (Price)
T = time-to-maturity
t = the year you get a certain cashflow
if coupon rate = required rate P = Face Value
if coupon rate > required rate P > Face Value
if coupon rate < required rate P < Face Value
, T
CF t
P=∑
t =1 (1+ y)t
y (YTM )=¿ Yield to maturity = percentage
y t =¿ interest rate of t, if coupon = 0
If P > face value, then yield to maturity < coupon rate
If P < face value, then yield to maturity > coupon rate
If P = face value, then yield to maturity = coupon rate
(1+r t )t
1+ ¿t −1 f t= t −1
¿
(1+ r t−1)
f =¿ forward rate
n=¿ the current year
.t −1 f t=E ¿ ¿ )
E( ¿t−1 r t )=¿ ¿ Expected value of r one year later = expectations theory
.t −1 f t=E (¿t −1 r t )+ L1 ,t ¿
Liquidity preference theory = Investors prefer short term investments because of
uncertainty of inflation, issuers prefer long term loan because it reduces their
interest rate risk. To get longer loans, issuers offer a positive liquidity premium.
L1 ,t = Liquidity premium
Market segmentation theory = The market is divided in different segments each containing
suppliers and demanders of capital with their own maturity preference. Suppliers and
demanders are not prepared to leave their segment. Interest rate in different segments
are not related to each other.
t
D=∑ weight of PV t∗t
t =1
D=¿ Duration = yield elasticity of the price
