Types of Public and

Private Loans
 Types of Loan Market
Instruments
There are 4 basic types of credit market instruments
1. usual kind of loan : principal loan repaid with
interest at the end of the maturity period
2. fixed-payment loan: principal repaid with interest
by making equal payments over a maturity period
3. coupon bond : fixed interest amount repaid within
the repayment period and thereafter principal
amount (face value) repaid
4. discount bond : (also called zero-coupon bond)
purchased at less than the face value
 Calculation of yield to maturity
of simple loan
Concept of Present Value

FV= PV ( 1 +i )

Simple Loan : i = FV PV
PV
 Calculation of yield to maturity
of Fixed payment loan

Fixed Payment Loan : Calculator /computer

(LV,FP,n),

LV= FP/(1+i) + FP/(1+i) 2 + FP/(1+i) 3... Upto n years

Where LV = Loan Value
FP = Fixed yearly payment
n = number of years
 Coupon Bond:: Calculator /computer
(P,C,F, n), i can be found-out
How coupon bond is a loan? Example 3Y3MSP
(1 eqn. and 1 unknown)

P = C/(1 + i) + C/(1 + i) 2 + C/(1 + i) 3

+ C/(1+i) n + F/ (1 + i) n

Where P = Price of coupon bond / Loan Value(LV)

C = Yearly coupon payment
F = Face value of the bond
n = Years of maturity
 Discount Bond
How discount bond is a loan?

Tk 900 = Tk 1000/ (1+i)

Therefore i = F- P / P

where F= Face value of the discount bond

P = current price of the discount bond
PRICE OF BOND IS INVERSELY
RELATED TO ITS PRICE

EXAMPLE: SUPPOSE YOU BUY A

BOND WITH TK 900 HAVING A FACE
VALUE OF TK 1000
Tk 900 = Tk 1000/ (1+i),Therefore i =
F- P / P = 1000-900/900
= 11.1%
If same bond is available with Tk 600, then
i = F- P / P = 1000=600/600 = 66.6%
Other Measures of Interest Rates
Calculating Interest Rate of a CONSOL

Consol gives fixed return say Tk 1000 per year for

indefinite period
i= C/ P where
i = yield to maturity
C = fixed yearly payment
P = price of the consol
 Distinction between interest rate
and Returns
Return = Interest receipt + Capital gain
Purchase Price
= Int. Receipt/ P. Price + Cap.
gain/P. price

RET = i + g ( Rate of interest + Rate of

capital gain)
 Distinction between Real and
Nominal Interest rates
Real Interest rates are nominal interest rates
adjusted by subtracting expected changes in
the price level (inflation) so that it truly reflects
cost of borrowing.

i (n) = i + Inf. Rate

or i = i (n) - Inf. Rate
If Nominal interest is 12% and current
inflation rate is 5%, then real interest rate is
12% - 5% = 7%
The End
 Class practice
1. Draw FVIF and PVIF curves when FV and PV are equal to Tk50 and Tk100
respectively for 5%,10% and 15% rate of interest. What the different points of
intersection shows?
2. Explain shape of FVIF and PVIF curves by drawing parallel and perpendicular
lines (2 x2 = 4 graphs).
3. Construct FVIF, PFIV, FVAnIF and PVAnIF tables for 2-4 years with 8% rate of
interest.
4. Draw a 4 x 4 matrix in full page where rows and columns refer to types of Loan
instruments. Point out similarities in left side of the diagonal or difference in the
right side of the diagonal.
5. Difference betn 2nd and 3rd
6. Where installment pmt higher 2nd/3rd why
7. Why LV = PV of all payments