you one year from now is more valuable to you than a dollar today. For a given interest rate, the future value of $100 increases with the passage of .2 .time. Thus, the longer the period of time, the greater the future value When computing an interest rate, the rate will increase the larger the future .3 10. 11. 12. 13. 14. 15. 16. 17. 19 .value, holding present value and the number of periods constant In case of the simple loan, the lender provides the borrower with the principal that must be repaid periodically with an additional payment of interest. For fixed payment loans, the periodic payment is mainly the coupon payment, unlike the case of the coupon bonds. For the coupon bond, the borrower pays at the maturity date the last installment which consists of part of the principal plus the interest. The coupon payment is calculated as the yield to maturity divided by the par value of the bond. Many people prefer the purchase of discount bonds because of their high interest payments. Economists consider the yield to maturity as the most accurate measure of the inflation rate. One important characteristic of the coupon bond is that its price and yield to maturity are positively related. The price of the perpetuity is positively related to its yield to maturity. The current yield is frequently used as an approximation to describe the interest rates on short term bonds. The yield to maturity of a discount treasury bill with a face value of $3000 and bought with $2700 is 5.23%. An important feature of the discount bonds is that its yield to maturity is inversely related to face value. Rate of return on a security is any change in its value expressed as a fraction to its selling price. Rate of return on a $2000-facevalue coupon bond with a coupon rate of 5% bought from a year by $2000 and sold now for $1750 is 12.5%. The rate of return on a bond is exactly equal its yield to maturity if the time to maturity is longer than the holding period. A fall in bond nrices as a result of a rise in interest rates will lead to a canital