All cards
1
in compounding frequency when m (periods per year) goes to infinity, what is this called?
continuous compounding (which is basically daily compounding so m=365)
2
Suppose that a lender quotes the interest rate on loans as 8% per annum with continuous compounding, and that interest is actually paid quarterly, the loan was for 1000. what is Rc, m, and A?
Rc = 8%, m=4(quarterly), and A = 1000
3
what is the n-year zero rate?
rate of interest earned on an investment that starts today and lasts for n years
4
how do zero coupon rates work?
the main thing about zero coupon rates is that it pays no interest, it just "matures" into a higher value at the end of the n years
5
what are coupon rates used for?
it allows investors to buy bonds at a discount
6
how do you find future value to use in calculating present value?
FV = principal*(1+rate)^n
7
How do you calculate zero rate present value?
the sum of present values per period: raise in price using a regular coupon (or FV - principal) / (1+zero rate of year n)^n, gives the present value, or the price of the bond
8
what are zero coupon rates used for?
they allow investors to make a fair comparison when trading stock