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Things to remeber
- Zero-coupon bond is a bond, which does not pay coupons.
- Bonds are often quoted in terms of a clean price, which is the bond's cash prece less an adjustment for accrued interest.
- As interest rates and bond yields rise, bond prices will fall, and vice versa.
- Bonds with short horizons and bonds with higher coupon rates are less sensitive to changes in interest rates.
- The effective annual rate(EAR) is often referred to as the effective annual yield(EAY) or the annual percentage yield(APY).
- When computing the present value of an annuity, a common mistake is to use the annuity formula with single interest rate even though interest rates vary with the investment horizon.
- The real interest rate(the rate of rowth of your purchasing power, after adjusting for inflation) should not be used as a discount rate for future cash flows(it can only be used if the cash flows have been adjusted to remove the effect of inflation(cash flows are in real terms))
Sir Oliver Sirfes- -So, but what kind of security could you offer? You don't have any land, I suppose?
Charles Surfes- -Not a handful, not a blade of grass, except in the flower pots outside the window.
(The School for Scandal)