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1、CHAPTERInterestRates5NCHAPTER4,WEEXPLOREDTHEMECHANICSOFCOMPUTINGNOTATIONpresentvaluesandfuturevaluesgivenamarketinterestrate.ButIEAReffectiveannualratehowdowedeterminethatinterestrate?Inpractice,interestispaidrinterestrateordiscountandinterestratesarequotedindifferentways.Forexample,inmid-
2、2012,rateMetropolitanNationalBankofferedsavingsaccountswithaninterestratePVpresentvalueof1.65%paidattheendofeachyear,whileAIGBankofferedanannualFVfuturevalueinterestrateofonly1.60%,butpaidonadailybasis.Interestratescanalsodifferdependingontheinvestmenthorizon.InJuly2012,investorsearnedCcas
3、hflowlessthan0.25%onone-yearrisk-freeU.S.TreasuryBills,butcouldearnAPRannualpercentageratemorethan2.3%ontwenty-yearTreasuries.Interestratescanalsovarydueknumberofcompoundingtoriskortaxconsequences:TheU.S.governmentisabletoborrowataperiodsperyearlowerinterestratethanJohnson&Johnson,whichint
4、urncanborrowatrrrealinterestratealowerratethanAmericanAirlines.irateofinflationInthischapter,weconsiderthefactorsthataffectinterestratesandNPVnetpresentvaluediscusshowtodeterminetheappropriatediscountrateforasetofcashflows.WebeginbylookingatthewayinterestispaidandinterestratesCncashflowtha
5、tarrivesinperiodnarequoted,andweshowhowtocalculatetheeffectiveinterestpaidinnnumberofperiodsoneyeargivendifferentquotingconventions.Wethenconsidersomeofthemaindeterminantsofinterestrates—namely,inflationandgovern-rninterestrateordiscountrateforann-yeartermmentpolicy.Becauseinterestratesten
6、dtochangeovertime,investorswilldemanddifferentinterestratesfordifferentinvestmenthorizonsttaxratebasedontheirexpectations.Finally,weexaminetheroleofriskindeter-mininginterestratesandshowhowtoadjustinterestratestodeterminetheeffectiveamountreceived(orpaid)afteraccountingfortaxes.141142Chapt
7、er5InterestRates5.1InterestRateQuotesandAdjustmentsInterestratesarequotedinavarietyofways.Whilegenerallystatedasanannualrate,theinterestpaymentsthemselvesmayoccuratdifferentintervals,suchasmonthlyorsemian-nually.Whenevaluatingcashflows,however,wemustuseadiscou
