1. Lecture 8: Interest rate vs. other related variables
Mishkin chapter 4 – part B
Page 79-91

2. Current yield (iC)
Current yield is an approximation to the yield to maturity for coupon bonds.

3. Current yield
Current yield would be a better approximation to yield to maturity if:
purchasing price (P) is nearer to the face value (F)
maturity is longer
Current yield ic and the yield to maturity i always move together in response to changes in the purchase price (P).

4. Yield on a discount basis (idb)

5. Yield on a discount basis
Discount yield idb understates yield to maturity; longer the maturity, greater is understatement.
Discount yield idb and yield to maturity i always move together in response to changes in the purchase price (P).

6. Rate of return (r) Return = payments + capital gain
Rate of return = return/price

7. Real vs. nominal interest rates
Previous interest rates are all nominal interest rate .
Real interest rate is adjusted for changes in price level so it more accurately reflects the cost of borrowing.

8. Interest rate risk
For bond holders who would sell the bond someday before maturity:
Prices and returns for long-term bonds are more volatile (i.e. higher interest rate risk) than those for shorter-term bonds.

10. Recap Current yield Yield on a discount basis Rate of return
Nominal and real interest rate
Interest rate risk
Quiz