8/20/2019 Notes Inclass 4

http://slidepdf.com/reader/full/notes-inclass-4 1/3

8/20/2019 Notes Inclass 4

http://slidepdf.com/reader/full/notes-inclass-4 2/3

<5 ((-p)')+(!"')

?5 the term o securit# (in da#s)

 1he #ield(r) on the discount securit# is not the same as the discount rate (d) and

the #ield is ,reater than the discount rate.

-3oth the #ield and the discount rate are t#picall# calculated on a nominal

interest rate 3asis

-the #ield (r) is the return on the amount invested0

A5 ((-p)'@) + (!"')

@5 ?' ((:('!") + r) or @5 ? ((:-('!") + d)

 @rice 3asis o a value point (@CB@))

 1he price 3asis o a value point is the chan,e in the price o a securit# resultin,

rom a one 3asis point chan,e in the market #ield.Doldin, period #ield (D@E)

Fhen a securit# is sold 3eore maturit# the holdin, period #ield is the terun

earned over the period.

Gero coupon 3onds

&re a 3ond-t#pe securit# that pa#s onl# the ace value () at maturit# and no

other cash =o6s

 1he price equals the net present value (N@C o the ace value ()

&nnuities

-annuities are another 3ond-t#pe securit# that pa# a constant income =o6 H

each period 3ut no separate pricpal pa#ment at maturit#

-&nnuities t#picall# have characteristics0

-the# provide or the same pa#ment each period

-each pa#ment is made 6ith the same requenc# (ever# ortni,ht; month; hal-

#ear etc.)

-pa#ments have an end date

-the price is the npv o

oupon 3onds

-coupon 3onds are a com3ination o a GB and a annuit# o matchin, #ield and

maturit#

-coupon 3onds pa# re,ular income H each period (coupon pa#ments) as 6ell as

ace value (?) at maturit#

-oupon rate + ace value

Mort,a,es

8/20/2019 Notes Inclass 4

http://slidepdf.com/reader/full/notes-inclass-4 3/3

-de>nition0 a loan secured over propert# 6hich is repaid in equal pa#ments;

includin, 3oth principal and interest

- 6ith re,ular (equal) repa#ments the loan is 3ein, paid o/ (principal reduction)

at an increasin, rate- each additional repa#ment is pa#in, more o/ the principal

and less o/ the interest component

redit oncier loan

Morta,e prepa#ments

-prepa#ment o >+ed interest mort,a,es t#picall# incurs a pentalt#.

 1his is needed to compensate the lender or capital losses 6hen interest rates

all (opportunit# cost).

-3orro6er is also more likel# to 3e attracted to a prepa#ment o a >+ed interest

mort,a,e 6hen interest rates all.