Management and Organizational Studies 4312A/B Chapter Notes - Chapter 4: Libor, Risk-Free Interest Rate, Compound Interest

• School: Western University
• Department: Management and Organizational Studies
• Course: Management and Organizational Studies 4312A/B
• Professor: Shahbaz Sheikh

Document Summary

Interest rate applicable in a situation depends on the credit risk. Treasury rates: rates earned on treasury bills or bonds, instruments used by government to borrow in its own currency, totally risk free. Libor: london interbank offered rate assume it"s the proxy used for the risk free rate, reflect the rate of interest at which banks can obtain unsecured loans from other banks. Investor agrees to sell securities and buy it back later at a higher price. The difference amount is the repo rate/interest paid. Risk free rate: financial institutions have traditionally used libor rates as risk free rates. Have to take into consideration compounding when given an interest rate. The new present value of all the future cash flows of the bond. Remember to put a negative scene on the exponent when discounting. Single discount rate that when applied to all cash flos, gives the bond"s value equal o the market value.