MYLAB ECONOMICS WITH PEARSON ETEXT -- A
MYLAB ECONOMICS WITH PEARSON ETEXT -- A
5th Edition
ISBN: 2819260099840
Author: Mishkin
Publisher: PEARSON
bartleby

Concept explainers

Question
Book Icon
Chapter 4, Problem 1LO
To determine

To determine- The present value of the future value of the future cash flows and yield to maturity of the four types of credit instruments is to be discussed.

Concept Introduction

Credit Market Instruments- There are four essential credit market instruments; simple loan, fixed payment loan, coupon bond and discount bond.

Simple loan- It is the amount of fund lent by a creditor to the borrower which must be repaid in principal and interest after a specified period of time known as the time of maturity of the loan.

Fixed Payment Loan- It refers to the funds given by the lender to the borrower which must be repaid as a fixed amount in a specific period of time (like a month, quarter or year). The value repaid in each period is inclusive of the principal and interest.

Coupon Bond- A coupon bond is issued by a corporation or government with a given face value, coupon rate and date of maturity. The lender issues the bond to the borrower. The latter receives a fixed interest income in each period equal to the coupon value. At the time of maturity, the face value of the bond is repaid to the creditor.

Discount Bond- A discount bond or a zero coupon bond is bought by the borrower at a price below its face value. The borrower gets no interest income or coupon interest as in the case of coupon bonds. Instead, he gets the face value as the time of maturity which is known to be higher than the investment made in purchasing.

Present value- It implies the current value of the future income or stream of cash flows calculated with a given discount rate. This discount rate is inversely related to the present value of the income.

Yield to maturity- It is the annual percentage rate or APR commonly known as the discount rate at which the sum of the future stream of income equals the current price of the bond. It is the most accurate measure of the interest rate and is often called the Internal Rate of Return or IRR

Expert Solution & Answer
Check Mark

Explanation of Solution

For the simple loan, the present value (PV) of the amount to be repaid (C1) after n years given that the rate of discount is r is:

????=
??
1
(??+??)
??

Here r is the discount rate of the yield to maturity for the simple loan.

For a fixed loan, the present value (PV) of the steam of cash flows to be repaid towards the loan taken by the borrower (Ci) where i is the time period for n number of years at a discount rate of r percent per period is:

????=
??=1
??
????
(1+??)
??

Here r is the yield to maturity.

For a coupon bond, the present value (PV) of the interest (Ci) earned per period i, where i ranges from 1 to n is:

????=
??=1
??
????
(1+??)
??
+
????
(1+??)
??

Where FV is the face value of the coupon and r is the rate of discount or the yield to maturity.

For the discounted coupon the present value is calculated using the same formula as the simple loan:

????=
??
1
(??+??)
??

Where C1 is the face value of the bond, r is the rate of discount and n is the time period when the bond shall repay.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Students have asked these similar questions
Richard has just opened a new restaurant. Not being good at deserts, he has contracted with Carla to provide pies. Carla’s costs are $10 per pie, and she sells the pies to Richard for $25 each. Richard resells them for $50, and he incurs no costs other than the $25 he pays Carla. Assume Carla’s costs go up to $30 per pie. If courts always award expectation damages, which of the following statements is most likely to be true?
Difference-in-Difference In the beginning of 2001, North Dakota legalized fireworks. Suppose you are interested in studying the effect of the legalizing of fireworks on the number of house fires in North Dakota. Unlike North Dakota, South Dakota did not legalize fireworks and continued to ban them. You decide to use a Difference-in-difference (DID) Model. The numbers of house fires in each state at the end of 2000 and 2001 are as follows: Number of house fires in Number of house fires in Year North Dakota 2000 2001 35 50 South Dakota 54 64 a. What is the change in the outcome for the treatment group between 2000 and 2001? Show your working for full credit. (10 points) b. Can we interpret the change in the outcome for the treatment group between 2000 and 2001 as the causal effect of legalizing fireworks on number of house fires? Explain your answer. (10 points)
C. Regression Discontinuity Birth weight is used as a common sign for a newborn's health. In the United States, if a baby has a birthweight below 1500 grams, the newborn is classified as having “very low birth weight". Suppose you want to study the effect of having very low birth weight on the number of hospital visits made before the baby's first birthday. You decide to use Regression Discontinuity to answer this question. The graph below shows the RD model: Number of hospital visits made before baby's first birthday 5 1400 1450 1500 1550 1600 Birthweight (in grams) a. What is the running variable? (5 points) b. What is the cutoff? (5 points) T What is the discontinuity in the graph and how do you interpret it? (10 points)
Knowledge Booster
Background pattern image
Economics
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.
Similar questions
SEE MORE QUESTIONS
Recommended textbooks for you
Text book image
ENGR.ECONOMIC ANALYSIS
Economics
ISBN:9780190931919
Author:NEWNAN
Publisher:Oxford University Press
Text book image
Principles of Economics (12th Edition)
Economics
ISBN:9780134078779
Author:Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:PEARSON
Text book image
Engineering Economy (17th Edition)
Economics
ISBN:9780134870069
Author:William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:PEARSON
Text book image
Principles of Economics (MindTap Course List)
Economics
ISBN:9781305585126
Author:N. Gregory Mankiw
Publisher:Cengage Learning
Text book image
Managerial Economics: A Problem Solving Approach
Economics
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Cengage Learning
Text book image
Managerial Economics & Business Strategy (Mcgraw-...
Economics
ISBN:9781259290619
Author:Michael Baye, Jeff Prince
Publisher:McGraw-Hill Education