Formula

Control+Shift+Plus Sign to do small numbers

Alt Code (0247) on the numeric keypad. For divide
Lecture 2
Measuring Interest Rates: Present Value

Present value (PV): The value today (t = 0) of a payment to be received in the future (t = n). PV of
$100 to be paid at t = n $100 t = 0 t = n 𝑷𝑽 = 𝑭𝑽/ 𝟏 + 𝒊 𝒏

Where: • 𝑃𝑉 = Present value • 𝐹𝑉 = Future value • 𝑖 = interest rate • 𝑛 = number of years until
maturity Here, we are discounting to determine the present value.

Interest rate is always 0. Because it is less than 100 for example 20 % is 0.20.

Compounding is usually 1.

𝑷𝑽 = 𝑭𝑽/( 𝟏 + 𝒊) 𝒏

Measuring Interest Rates: Future Value

Future value (FV): The value in the future (t = n) of an amount invested today (t = 0). $100 FV of $100
invested at t = 0 t = 0 t = n 𝑭𝑽 = 𝑷𝑽 𝟏 + 𝒊 𝒏

Where: • 𝑃𝑉 = Present value • 𝐹𝑉 = Future value • 𝑖 = interest rate • 𝑛 = number of years until
maturity Here, we are compounding to determine the future value.

Same as above just different order for formular.

𝑭𝑽 = 𝑷𝑽 (𝟏 + 𝒊) 𝒏

Measuring Interest Rates: YTM of Bonds

𝑷 = 𝑭 𝟏 + 𝒊 𝒏 $𝟗𝟎𝟎 = $𝟏𝟎𝟎𝟎 (𝟏 + 𝒊) Solving for 𝒊 gives a YTM of 11.11% Measuring Interest Rates:
YTM of Bonds

In this example of a one-year discount bond: • 𝑃 = Bond price • 𝐹 = Face value of bond • 𝑖 = annual
interest rate • 𝑛 = number of years until maturity

𝑷 = 𝑭 ÷(𝟏 + 𝒊)𝒏 $ 𝟗𝟎𝟎 = $𝟏𝟎𝟎𝟎 ÷(𝟏 + 𝒊)

Measuring Interest Rates: YTM of Bonds

In this example of a perpetuity or consol bond: • 𝑃 = Consol price • 𝐶 = Coupon payment • 𝑖 = annual
interest rate

Real Interest Rates

The real interest rate is calculated as: 𝒊𝒓 = 𝒊 – 𝝅e• Where: 𝒊𝒓 = real interest rate 𝒊 = nominal interest
rate 𝝅 𝒆 = expected inflation rate

𝒊𝒓 = 𝒊 – 𝝅e