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Chapter 4 Interest Rates

Chapter Objectives

By the end of this chapter, students should be able to:

  1. Define interest and explain its importance.
  2. Write and explain the present value formula.
  3. Write and explain the future value formula.
  4. Calculate present and future value for multiple periods with annual and more frequent compounding.
  5. Define and price major types of debt instruments including discount bonds, simple loans, fixed payment loans, coupon bonds, and perpetuities.
  6. Define yield to maturity and identify the types of financial instruments for which it is relatively easy to calculate.
  7. Explain why bond prices move inversely to market interest rates.
  8. Explain why some bond prices are more volatile than others.
  9. Define rate of return and explain how it differs from yield to maturity.
  10. Explain the difference between real and nominal interest rates.