Periodic interest payments

The periodic interest payments made by the issuer (i.e., coupon payments). 

In an interest rate swap, the counterparties agree to exchange periodic interest payments. The euro amount of the interest payments exchanged is based on the notional principal. In the most common type of swap, there is a fixed-rate payer and a fixed-rate receiver. The convention for quoting swap rates is that a swap dealer sets the floating rate equal to the reference rate and then quotes the fixed rate that will apply. 

An interest rate swap is an agreement between two counterparties to make periodic interest payments to one another during the life of the swap. These payments take place on a predetermined set of dates and are based on a notional principal amount. The principal is notional because it is never physically exchanged—hence the off-balance-sheet status of the transaction—but serves merely as a basis for calculating the interest payments. 

Because bonds typically have a predictable stream of payments of interest and repayment of principal, many people invest in them to receive interest income or to preserve and to accumulate capital. If you are looking for current income, you will most likely be interested in bonds that pay an interest rate that stays fixed until maturity with interest that is paid semiannually. However, if you are saving for retirement or a child s education or other capital accumulation goal, you may wish to consider investing in zero coupon bonds which do not have periodic interest payments. Instead, they are sold at a substantial discount from their face amount and the investor receives one payment— at maturity—that is equal to the purchase price (principal) plus the total interest earned, compounded semiannually at the original interest rate. 

Short-Interval Compound Interest If interest payments become due m times per year at compound interest, mn payments are required in n years. The nominal annual interest rate Y is divided by m to give the effective interest rate per period. Hence,... 

Period Amount Owed at Beginning of Period Interest Due at End of Period Payment at End... 

Capitalization takes account of interest payments and foregone earnings from investments of comparable riskiness during the lengthy R D investment period for a new drug. 

All debt contracts require payment of interest on the loan and repayment of the principal (either at the end of the loan period or amortized over the period of the loan). Interest payments are a fixed cost, and if a company defaults on these payments, then its ability to borrow money will be drastically reduced. Since interest is deducted from earnings, the greater the leverage of the company, the higher the risk to future earnings, and hence to future cash flows and the financial solvency of the company. In the worst case, the company could be declared bankrupt and the assets of the company sold off to repay the debt. Finance managers therefore carefully adjust the amount of debt owed by the company so that the cost of servicing the debt (the interest payments) does not place an excessive burden on the company. 

Periodic Interest Rate. The annual interest rate divided by the payments per year. For a 10 percent annual interest rate and monthly repayments, this is 0.10/12. 

The simple interest payment each year, is found by multiplying the interest rate, /, times the invested capital, or principal, P. Thus, / = Pi. After any n time periods, the accumulated value of money owed under simple interest, would be... 

The interest payment each year, or each period, is found by multiplying the interest rate by the... 

Cash flow is simply the cash that is expected to be received in the future from owning a financial asset. For a fixed-income security, it does not matter whether the cash flow is interest income or repayment of principal. A security s cash flows represent the sum of each period s expected cash flow. Even if we disregard default, the cash flows for some fixed-income securities are simple to forecast accurately. Noncallable benchmark government securities possess this feature since they have known cash flows. For benchmark government securities, the cash flows consist of the coupon interest payments every year up to and including the maturity date and the principal repayment at the maturity date. 

The most obvious source of dollar return is the annual coupon interest payments. For the 1 million par value of this 5-year bond, the annual coupon payments consist of five payments of 30,000 with the first occurring on April 11, 2004. Since this bond has a settlement date that does not fall on a coupon payment date, the buyer pays the seller accrued interest. There are 89 days the first interest accrual date (11 April 2003) and the bond s settlement date of 9 July 2003. In addition, there are 366 days in the annual coupon period. At settlement, the buyer will pay the seller 7,295.08 (per 1 million in par value) in accrued interest which is calculated as follows ... 

Normally, the fixed interest payments are paid on the basis of a 30/ 360 day count floating-rate payments are paid on the basis of an actual/ 360 day count. Accordingly, the fixed interest payments will differ slightly owing to the differences in the lengths of successive coupon periods. The floating payments will differ owing to day counts as well as movements in the reference rate. 

The Senior Notes shall be redeemed (in whole but not in part) by the Issuer at the direction of the holders of more than 50% of the aggregate principal amount outstanding as at the Final Closing Date of the Junior Notes. Any such redemption is subject to the following conditions (a) no such redemption may occur on any date other than an Interest Payment Date (b) other than as a result of the occurrence of certain tax events, no such redemption may occur prior to the end of the Reinvestment Period and (c) no optional redemption of the Senior Notes may occur unless there are sufficient proceeds to repay all the Senior Notes and any accrued and unpaid fees and expenses. 

Annuity equations relating F and the periodic payments. A, are converted to equations relating P to A by combining them with Eq. (17.12) for discrete interest or Eq. (17.20) for continuous interest. This is often referred to as discounting the amount of the annuity to determine its present worth. In Table 17.7, under periodic interest, the discrete uniform-series sinking-fund deposit factor becomes the discrete uniform-series capital-recovery facte in the following manner ... 

Bonds are debt instruments that represent cash flows payable during a specified time period. They are essentially loans. The cash flows they represent are the interest payments on the loan and the loan redemption. Unlike commercial bank loans, however, bonds are tradable in a secondary market. Bonds are commonly referred to 3S fixed-income instruments. This term goes back to a time when bonds paid fixed coupons each year. That is... 

A bond s term to maturity is crucial because it indicates the period during which the bondholder can expect to receive coupon payments and the number of years before the principal is paid back. The principal of a bond—also referred to as its redemption value, maturity value, par value, or face value—is the amount that the issuer threes to repay the bondholder on the maturity, or redemption, date, when the debt ceases to exist and the issuer redeems the bond. The coupon rate, or nominal rate, is the interest rate that the issuer agrees to pay during the bond s term. The annual interest payment made to bondholders is the bond s coupon. The cash amount of the coupon is the coupon rate multiplied by the principal of the bond. For example, a bond with a coupon rate of 8 percent and a principal of 1,000 will pay an annual cash amount of 80. 

Note that 2A is now the power to which the discount factor is raised. This is because a bond that pays a semiannual coupon makes two interest payments a year. It might therefore be convenient to replace the number of years to maturity with the number of interest periods, which could be represented by the variable n, resulting in formula (1.14). 

Although for the purposes of explaining swap structures both parties are said to pay and receive interest payments, in practice only the net difference between both payments changes hands at the end of each interest period. This makes administration easier and reduces the number of cash flows for each swap. The final payment date falls on the maturity date of the swap. Interest is calculated using equation (7.1). 

Note that although swap rates are derived from forward rates, a swaps interest payments are paid in the normal way, at the end of an interest period, while FRA payments are made at the beginning of the period and must be discounted. 

To provide precise protection against inflation, interest payments for a given period would need to be corrected for actual inflation over the same period. Lags, however, exist between the movements in the price index and the adjustment to the bond cash flows. According to Deacon and Derry (1998), such lags are unavoidable for two reasons. First, inflation statistics for one month are usually not known until well into the following month and are published some time after that. This causes a lag of at least one month, as shown in FIGURE 12.3. Second, in some markets the size of a coupon payment must be known before the start of the coupon period in... 

N = number of interest periods t = each interest payment date ri = the mortgage yield... 

Loan interest payment in country n in period t = LnPti f m T)... 

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