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Business LibreTexts

4: Interest Rates

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    Learning Objectives

    By the end of this chapter, students should be able to:

    • Define interest and explain its importance.
    • Write and explain the present value formula.
    • Write and explain the future value formula.
    • Calculate present and future value for multiple periods with annual and more frequent compounding.
    • Define and price major types of debt instruments including discount bonds, simple loans, fixed payment loans, coupon bonds, and perpetuities.
    • Define yield to maturity and identify the types of financial instruments for which it is relatively easy to calculate.
    • Explain why bond prices move inversely to market interest rates.
    • Explain why some bond prices are more volatile than others.
    • Define rate of return and explain how it differs from yield to maturity.
    • Explain the difference between real and nominal interest rates.

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