金融市場英文教學(xué)課件：ch3 What Do Interest Rates Mean and What Is Their Role in Valuation

1、Part TwoFundamentals of Financial MarketsChapter 3What Do Interest Rates Mean and What Is Their Role in Valuation?Copyright 2009 Pearson Prentice Hall. All rights reserved.3-3Chapter PreviewInterest rates are among the most closely watched variables in the economy. It is imperative that what exactly

2、 is meant by the phrase interest rates is understood. In this chapter, we will see that a concept known as yield to maturity (YTM) is the most accurate measure of interest rates.Copyright 2009 Pearson Prentice Hall. All rights reserved.3-4Chapter PreviewAny description of interest rates entails an u

3、nderstanding certain vernacular and definitions, most of which will not only pertain directly to interest rates but will also be vital to understanding many other foundational concepts presented later in the text.Copyright 2009 Pearson Prentice Hall. All rights reserved.3-5Chapter PreviewSo, in this

4、 chapter, we will develop a better understanding of interest rates. We examine the terminology and calculation of various rates, and we show the importance of these rates in our lives and the general economy. Topics include:Measuring Interest RatesThe Distinction Between Real and Nominal Interest Ra

5、tesThe Distinction Between Interest Rates and ReturnsCopyright 2009 Pearson Prentice Hall. All rights reserved.3-6Measuring Interest RatesDifferent debt instruments have very different streams of cash payments to the holder (known as cash flows), with very different timing. All else being equal, deb

6、t instruments are evaluated against one another based on the amount of each cash flow and the timing of each cash flow.This evaluation, where the analysis of the amount and timing of a debt instruments cash flows lead to its yield to maturity or interest rate, is called present value analysis.Copyri

7、ght 2009 Pearson Prentice Hall. All rights reserved.3-7Present ValueThe concept of present value (or present discounted value) is based on the commonsense notion that a dollar of cash flow paid to you one year from now is less valuable to you than a dollar paid to you today. This notion is true beca

8、use you could invest the dollar in a savings account that earns interest and have more than a dollar in one year.The term present value (PV) can be extended to mean the PV of a single cash flow or the sum of a sequence or group of cash flows. Copyright 2009 Pearson Prentice Hall. All rights reserved

9、.3-8Present Value ApplicationsAn exampleThere are four basic types of credit instruments which incorporate present value concepts:Simple LoanFixed Payment LoanCoupon BondDiscount BondCopyright 2009 Pearson Prentice Hall. All rights reserved.3-9Present Value Concept: Simple Loan TermsLoan Principal:

10、the amount of funds the lender provides to the borrower.Maturity Date: the date the loan must be repaid; the Loan Term is from initiation to maturity date.Interest Payment: the cash amount that the borrower must pay the lender for the use of the loan principal.Simple Interest Rate: the interest paym

11、ent divided by the loan principal; the percentage of principal that must be paid as interest to the lender. Convention is to express on an annual basis, irrespective of the loan term.Copyright 2009 Pearson Prentice Hall. All rights reserved.3-10Present Value Concept: Simple LoanCopyright 2009 Pearso

12、n Prentice Hall. All rights reserved.3-11Present Value Concept: Simple Loan (cont.) The previous example reinforces the concept that $100 today is preferable to $100 a year from now since todays $100 could be lent out (or deposited) at 10% interest to be worth $110 one year from now, or $121 in two

13、years or $133 in three years. Copyright 2009 Pearson Prentice Hall. All rights reserved.3-12Yield to Maturity: LoansYield to maturity = interest rate that equates todays value with present value of all future paymentsSimple Loan Interest Rate (i = 10%) Simple Loans require payment of one amount whic

14、h equals the loan principal plus the interest. Present Value of Cash Flows: ExampleCopyright 2009 Pearson Prentice Hall. All rights reserved.3-14Present Value Concept: Fixed-Payment Loan Terms2.Fixed-Payment Loans are loans where the loan principal and interest are repaid in several payments, often

15、monthly, in equal dollar amounts over the loan term. Installment Loans, such as auto loans and home mortgages are frequently of the fixed-payment type.Copyright 2009 Pearson Prentice Hall. All rights reserved.3-15Yield to Maturity: LoansFixed Payment Loan (i = 12%)Copyright 2009 Pearson Prentice Hal

16、l. All rights reserved.3-16Yield to Maturity: BondsCoupon Bond (Coupon rate = 10% = C/F)Consol: Fixed coupon payments of $C foreverCopyright 2009 Pearson Prentice Hall. All rights reserved.3-17Relationship Between Price and Yield to MaturityThree interesting facts in Table 3-1When bond is at par, yi

17、eld equals coupon ratePrice and yield are negatively relatedYield greater than coupon rate when bond price is below par valueCoupon bondCopyright 2009 Pearson Prentice Hall. All rights reserved.3-18Current Yield Current yield (CY) is just an approximation for YTM easier to calculate. However, we sho

18、uld be aware of its properties:If a bonds price is near par and has a long maturity, then CY is a good approximation.A change in the current yield always signals change in same direction as yield to maturityPerpetuityCopyright 2009 Pearson Prentice Hall. All rights reserved.3-19Yield to Maturity: Bo

19、ndsDiscount Bond (P = $900, F = $1000)Copyright 2009 Pearson Prentice Hall. All rights reserved.3-20An important feature:For a discount bond, the yield to maturity is negatively related to the current bond price.Yield on a Discount BasisOne-Year Bill (P = $900, F = $1000)Discount bondCopyright 2009

20、Pearson Prentice Hall. All rights reserved.3-21Relationship Between Price and Yield to MaturityThe value of a bond (price) and yield to maturity (YTM) are negatively related. If i increases, the PV of any given cash flow is lower; hence, the price of the bond must be lower.Copyright 2009 Pearson Pre

21、ntice Hall. All rights reserved.3-22Distinction Between Real and Nominal Interest RatesReal interest rate (def.)Interest rate that is adjusted for expected changes in the price levelReal interest rate more accurately reflects true cost of borrowingWhen the real rate is low, there are greater incenti

22、ves to borrow and less to lendCopyright 2009 Pearson Prentice Hall. All rights reserved.3-23Distinction Between Real and Nominal Interest RatesReal interest rateWe usually refer to this rate as the ex ante real rate of interest because it is adjusted for the expected level of inflation. After the fa

23、ct, we can calculate the ex post real rate based on the observed level of inflation.Copyright 2009 Pearson Prentice Hall. All rights reserved.3-24Distinction Between Real and Nominal Interest Rates (cont.)Two examplesIf i = 5% and e = 3% thenIf i = 8% and e = 10% thenIf youre the lender,If youre the

24、 borrower, Copyright 2009 Pearson Prentice Hall. All rights reserved.3-25Distinction Between Real and Nominal Interest Rates (cont.)The distinction between the real and nominal interest rates is important because.Copyright 2009 Pearson Prentice Hall. All rights reserved.3-26U.S. Real and Nominal Int

25、erest RatesSample of current rates and indexes/charts.htmCopyright 2009 Pearson Prentice Hall. All rights reserved.3-27Distinction Between Interest Rates and ReturnsAn exampleRate of Return: e.g.-we can decompose returns into two pieces.Return on a bond vs. interest rate on the bondReturn on a bondw

26、here = current yield, and= capital gains.Copyright 2009 Pearson Prentice Hall. All rights reserved.3-28Key Facts about the Relationship Between Rates and ReturnsSample of current coupon rates and yields on government bonds/markets/iyc.htmlCopyright 2009 Pearson Prentice Hall. All rights reserved.3-2

27、9Maturity and the Volatility of Bond ReturnsKey findings from Table 3-2Only bond whose return = yield is one with maturity = holding periodFor bonds with maturity holding period, i P implying capital lossLonger is maturity, greater is price change associated with interest rate changeCopyright 2009 P

28、earson Prentice Hall. All rights reserved.3-30Maturity and the Volatility of Bond Returns (cont.)Key findings from Table 3-2 (continued)Longer is maturity, more return changes with change in interest rateBond with high initial interest rate can still have negative return if i Copyright 2009 Pearson

29、Prentice Hall. All rights reserved.3-31Maturity and the Volatility of Bond Returns (cont.)Conclusion from Table 3-2 analysisPrices and returns more volatile for long-term bonds because have higher interest-rate riskNo interest-rate risk for any bond whose maturity equals holding periodCopyright 2009

30、 Pearson Prentice Hall. All rights reserved.3-32Reinvestment Risk Occurs if hold series of short bonds over long holding periodAn examplei at which reinvest uncertainGain from i , lose when i Summary:Holding period vs. yield to maturityCopyright 2009 Pearson Prentice Hall. All rights reserved.3-33Du

31、rationTo measure interest-rate risk More precise information on the actual capital gain or loss that occurs when the interest rate changes by certain amount.An exampleCopyright 2009 Pearson Prentice Hall. All rights reserved.3-34Calculating Durationi =10%, 10-Year 10% Coupon BondCopyright 2009 Pears

32、on Prentice Hall. All rights reserved.3-35Calculating Durationi = 20%, 10-Year 10% Coupon BondCopyright 2009 Pearson Prentice Hall. All rights reserved.3-36Formula for DurationKey facts about durationAll else equal, when the maturity of a bond lengthens, the duration rises as wellAll else equal, whe

33、n interest rates rise, the duration of a coupon bond fallCopyright 2009 Pearson Prentice Hall. All rights reserved.3-37Formula for DurationThe higher is the coupon rate on the bond, the shorter is the duration of the bondDuration is additive: the duration of a portfolio of securities is the weighted-average of the durations of the individual securities, with the weights equaling the proportion of the portfolio invested in eachCopyright 2009 Pearson Prentice Hall. All