rate on = the borrower to obtain credit 100. loanable Amount of credit made[r]
(1)(2)Chapter 6
Measuring and Calculating Interest Rates and
(3)6 3
McGrawHill/Irwin
Money and Capital Markets, 9/e © 2006 The McGrawHill Companies, Inc., All Rights Reserved.
Learning Objectives
• To explore the important relationships between the interest
rates on bonds and other financial instruments and their market value or price
• To look at the many different ways lending institutions may
calculate the interest rates they charge borrowers for loans
• To determine how interest rates or yields on deposits in banks,
(4)Introduction
• Many different interestrate measures attached to different
types of financial assets have been developed, leading to considerable confusion, especially for small borrowers and savers
• In this chapter, we will examine the methods most frequently
(5)6 5
McGrawHill/Irwin
Money and Capital Markets, 9/e â2006TheMcGrawưHillCompanies,Inc.,AllRightsReserved.
UnitsofMeasurement
ForInterestRatesandAssetPrices
ã Theinterestrateisthepricethatischargedtoaborrowerfor
theloanofmoney
• Interest Fee required by the lender for
rate on = the borrower to obtain credit 100
loanable Amount of credit made
funds available to the borrower
• Interest rates are usually expressed as annualized percentages.
(6)Units of Measurement
For Interest Rates and Asset Prices • A basis point equals 1/100 of a percentage point
• Example
(7)6 7
McGrawHill/Irwin
Money and Capital Markets, 9/e © 2006 The McGrawHill Companies, Inc., All Rights Reserved.
Units of Measurement
For Interest Rates and Asset Prices
• The prices of common and preferred stock are measured today
in many markets in terms of dollars and decimal fractions of a dollar (or some other currency unit)
• Example
(8)Units of Measurement
For Interest Rates and Asset Prices
• Bond prices are usually expressed in points and fractions of a
point, with each point representing $1 on a $100 basis or $10 for a $1000 bond
• Example
(9)6 9
McGrawưHill/Irwin
MoneyandCapitalMarkets,9/e â2006TheMcGrawưHillCompanies,Inc.,AllRightsReserved.
UnitsofMeasurement
ForInterestRatesandAssetPrices
ã Many security dealers who act as “market makers” usually
quote two prices for an asset
• The higher ask price is the dealer’s selling price, while the lower bid price is the dealer’s buying price
• The difference between the bid and ask prices – known as the
(10)Measures of the Rate of Return (Yield) On a Financial Asset
• The interest rate on a loan or other financial asset is not
necessarily a true reflection of the yield or rate of return actually earned by the lender during the life of the asset
Some borrowers may default on all or a portion of their promised payments