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FMI_3

FMI_3

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Published by Pml F Larkana

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Published by: Pml F Larkana on Dec 20, 2011
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05/05/2012

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LECTURE - 3

INTEREST RATES •An interest rate is that rate which is paid by a borrower for the use of money that he/she borrowed from lender. •Interest rate is in compensation to the lender for: .

tradingeconomics.com/inflation-rates-list-by-country .WORLD INEREST RATES http://www.

TYPES INTEREST RATES • SIMPLE INTEREST • COMPOUND INTEREST .

The official name of interest rate is discount rate in state bank term logy. In Pakistan. interest rates decisions are taken by the State Bank of Pakistan.•The benchmark interest rate in Pakistan was last reported at 13.5 percent. .

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TYPES OF CREDIT MAKRET INSTRUMENTS • SIMPLE LOAN • FIXED-PAYMENT LOAN • COUPEN BOND • DISCOUNT BOND .

par value. .YIELD TO MATURITY • Yield to maturity calculate the present value of cash flows received from investment. coupon interest rate and time to maturity. • The calculation of YTM takes into account the current market price.

• Real Interest Rate consider the inflation factor of economy. .REAL & NOMINAL INTEREST RATES. • Nominal interest rate is that you earn on your investment or pay as charge of using/holding money with you.

Nominal Interest Rate = Real Interest Rate + Expected Inflation Rate. .Fisher Equation • Fisher Equation named after great monetary economist IRVISH FISHER.

DISTINCTION BETWEEN INTEREST RATES & RETURNS • Rate of return is defined as interest payments received by owner of security/investment plus any change in the price of that security/bond. .

DISTINCTION BETWEEN INTEREST RATES & RETURNS Cont. . • It is not necessary that rate of return equal to interest rate of bond. unless you have subscribed it on par and will hold it till the maturity of the bond.

• Risk associated with bonds.MATURITY & VOLATILITY OF BOND RETURNS • The prices of long term maturity bond face heavy fluctuations due to change in prevailing interest rate as compare to short term maturity bonds. – Interest Rate Risk – Re-investment .

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