Samenvatting
Summary Money and Banking UvA part 1
- Instelling
- Universiteit Van Amsterdam (UvA)
Summary of the course part 1
[Meer zien]Voorbeeld 3 van de 16 pagina's
Voorbeeld 3 van de 16 pagina's
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Door: henrikkurm • 2 jaar geleden
Basic notes to pass, not to get a high grade
Door: SuusV • 2 jaar geleden
Hi! I got a 9 out of 10 for this exam. Good luck with your exam! Kind regards, Suus
Voorbeeld van de inhoud
Lecture 1Yield to
maturity Rate of return
YTM is the interest rate that matches A coupon band bought at time t and
/ price with the sold at t has
present
-11
today 's value
RET Re C + Pe Pt
future
= = -
value of all cash flows .
c- + i
Pt
PV CF
Pete
=
"
=
( +
,
-
Pt
Citi )
p , Pt
Credit market instruments
=
ic +
ge
where ic and
= current
yield
1 simple loan
2 Fixed
ge = rate of expected capital gain .
payment loan
-
3 coupon bond key facts maturity and returns
4 Discount ( ) bond
1 If return =
yield then
ze ro -
coupon
maturity =
holding period and vice
Relation YTM
price and versa .
1 Price and YTM a re
negatively related 2 If maturity >
holding period and
P t
"
2 the bond traded
"
at then it then
resulting in capital
If is
par ,
,
loss
price equal to its face value and
.
is
the YTM
3 The effect of interest rate changes
equals the coupon rate
is
larger for long maturities
3
.
YTM rate
>
coupon if bond price
4 The change in return becomes
larger
is below
par
when maturity increases if
Consol interest rate
changes .
A perpetuity or consol is a bond without 5 Bond with high initial interest rate
date ,
maturity so
principal is not payed and/or coupon rate can end up
continue
back and coupon payments with a
negative rate of return
forever .
if it .
Pc = C
Interest rate risk
ic
This approximation
longer term bonds react
stronger to
gives an
easy for
changes in interest For
any bond
the YTM bond
.
of a which is m o re
,
which is held for the entire maturity ,
precise if price is near
par and
long
there is no interest rate risk .
maturity .
Fisher equation
'
c- = r + He ,
ir = r =
i -
IT
when the real interest rate is lower ,
people a re m o re willing to borrow .
S. Veeling
, Demand shift
This can be caused
by the
following
Demand and
supply analyses bonds
for
factors :
If prices a re low and so interest high then
1
, ,
wealth if wealth
:
economy grows ,
demand is
higher and supply tower .
of individuals increases so that
If excess
supply ,
the price drops and in
demand for bonds increases and
case
of demand the price rises
Bd
excess .
shifts to the right .
Supply shift
2 Expected return of bonds relative to
This other assets if the bonds become
can happen in case
of :
:
1 Expected profitability of investments : less attractive
,
Bd shifts to the left
In times
of business cycle expansion ,
*
if expected interest rate ⇐p )
investment opportunities increase and
increases
,
so ie T ,
then Pete
BS shifts to the
right and as a result expected return
.
,
2 te
Expected inflation : i n c re a s e in
Re Iv and Bd shifts to the left .
leads to r = i -
ite t So the real
if expected inflation ITET then
.
*
,
and
cost
of borrowing decreases
ir=r ite t Bd
by = i and
-
BS T which shifts BS to the right .
shifts to the left .
3 Government deficit : an increase
3 Risk when
investing to bonds relative
shifts Bs to the right as
they
to other assets :
if risk in bonds
need to borrow
money .
increases
,
Bd Tv and shifts to the
left .
4 liquidity of bonds relative to other
assets :
if it becomes easier relative
to other assets to tur n the asset into
cash at low cost and small value
loss the demand for bonds increases
,
and Bd shifts to the right .
S. Veeling
, Lecture 2
Real and nominal interest rates
Fisher : r= i -
ite
gives an approximation .
Precisely :
Inflation -
indexed bonds
itr = iti The
coupon payments as well as face value
I1-1TE
a re
adjusted for inflation . If inflation
> it i =
I + r + we + rite
fluctuates ,
these bonds a re saver as
If r and ite a re small ,
it rtite
they are constant in real terms .
Unstable countries provide these bonds
Fisher effect in the US 1953 -2017
to attract funding Also stable countries
Usually te i
positively related
.
and a re .
these bonds which market
i ss u e
gives
•
stable
,
The real interest rate is
kept .
estimates of future inflation .
Those
so the nominal interest rate should
if
we used
for wage negotiations and
be low and stable so should be the 1T ?
bank because it tells them
by the central
inflation stable results in
keeping low and
if the market believes in their ability .
low nominal interest .
Quantitative
easing
Example : Business cycle expansion a policy in w h i ch the UK government
→ as expected profitability increase , bought a lot
of mostly long-term
companies want to borrow bonds This increased the
money .
government .
Bs T shift to the right price of bonds and so decreased the
,
wealth to interest rates
as increases want
*
people
.
,
buy B☐ T shift to the
more bonds .
, right
normally ,
the supply effect is
larger ,
therefore P v1 and i T .
Also explained
•
i He expected to
by r + IT as is
=
i n c re a s e in a business cycle expansion .
S. Veeling
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