Interest Rates

A dollar today is worth more than a dollar tommorow. That is where interest rates come in and sets a rate for borrowing money that is paid back to the lender.

There are four types of loans that pay interest rates. The first one is Simple Loans which is just the principle amount plus the agreed amount of interest. An example of a simple loan is borrowing money from a bank and paying a 6% interest for 3 year. The next type of loan is Fixed-Payment Loans which makes the borrower pay payments periodically until the debt is paid off. This is usually amortized and common in most mortgages. The next one is Coupon Bonds which are bonds where the borrower pays the interest in fixed periodic payments and pay the principal amount at maturity. The last one is Discount Bonds which are bonds that pay only face value but sold below that price.

When understanding interest rates, people have to know yeild to maturity. Yeild to maturity (YTM) is the most accurate way to meaure interest rates. YTM equates the present value and the interest rate that would be assocciated with that.

Current Yield & Discount Yield

What is current yeild? The current yeild is annual coupon payment dicived by bond price