ECO 205 Lecture Notes - Lecture 4: Nominal Interest Rate, Real Interest Rate, Current Yield
Document Summary
Preview: before we can go on with the study of money, banking, & financial markets, we must understand exactly what the phrase interest rates means. In this chapter, we see that a concept known as the yield to maturity is the most accurate measure of interest rate. In 1 year: (1 + 0. 10) = . In 2 years: (1 + 0. 10) = or (1 + 0. 10)2. In 3 years: (1 + 0. 10) = or (1 + 0. 10)3. Cf = future cash flow (payment) i = the interest rate. )i (1: cannot directly compare payments scheduled in diff points in the time line. 4 types of credit market instruments: simple loan, yield to maturity on a simple loan. Yield to maturity: the interest rate that equates the pv of cash flow payments received from a debt instrument with its value today. Cf = cash flow in one year = n.
