MBB10

2. Money, Banking,
and Business
Lecture 10
Interest Rates
and Bond Prices

3. Questions?

4. PresentValue
Discounting
Dividing
FutureValue
Compounding
Multiplying

5. Calculate Factor
PresentValue
Dividing
FutureValue
Multiplying

6. FutureValue?
Future Value = Amount Today x Factor
Factor is the Growth Formula
(1 + r )
n
r = rate
n = time periods

7. FutureValue?
(1 + r )
n
r = 10% or 0.10
n = 5 years
(1 + 0.10)5
(1.10)5
1.61

8. FutureValue?
Future Value = Amount Today x Factor
$161 = $100 x 1.61
Future Value is compounding
Future Value is multiplying

9. PresentValue?
Present Value = Future Amount ÷ Factor
Present Value = $100 ÷ 1.61
$62.11 = $100 ÷ 1.61
Present Value is discounting
Present Value is dividing

10. Present Future
x Factor ?
÷ Factor ?
Factor Formula = (1 + r )
n

11. Finance
Unknown - Present Value or Future Value?
Must know rate and number of periods
Compute Factor with formula
(1+r)n
If FV multiply
If PV divide

12. 1. Grandpa is going to give you $500 in 2028.
What is it worth to you today?Your discount
rate is 8%
2.You need to have $10,000 in 12 years.The
bank will pay 5% interest. How much should yo
deposit today?
3.You invest $1,000 today in a company that
grows 15% a year.What will it be worth in 5
years?
$231.59
$5,568
$2,011
Quiz

13. Bond
Standardized Loan
Standardizing makes things
easier

14. Pooley Pizza Company
Bond
100
Dollars
Dr. Gale
CEO
10% 2028
Pays $10 each year
Pays $100 at maturity
2019
Coupon
2020
Coupon
2021
Coupon
2022
Coupon
2023
Coupon
2024
Coupon
2025
Coupon
2026
Coupon
2027
Coupon
2028
Coupon

15. Market Interest Rate
Bond
Value
$
%

17. Pooley Pizza Company
Bond
100
Dollars
Dr. Gale
CEO
10% 2028
Pays $10 each year
Pays $100 at maturity
2019
Coupon
2020
Coupon
2021
Coupon
2022
Coupon
2023
Coupon
2024
Coupon
2025
Coupon
2026
Coupon
2027
Coupon
2028
Coupon
What you you pay for this bond?
Depends on Market Interest Rate

18. What you you pay for this bond?
Depends on Market Interest Rate
Calculate the present value of all
future benefits
Could be more or less than $100

20. What determines
market interest rates?
Supply and Demand

21. Loanable Funds $
%
Interest
Rate
Supply
Demand
households
business
government
foreign
households
business
government
foreign
FED

22. Loanable Funds $
%
Interest
Rate
Supply
Demand
Shortage

23. Loanable Funds $
%
Interest
Rate
Supply
Demand

24. Interest rates are a
function of GDP and
the Money Supply
i = f(Y,M)
+ -