1. Time Value of Money Flashcards
1
Q
What are the 3 interpretations of interest rates?
A
Required rate of return, Discount Rate, and Opportunity Cost
2
Q
What is the real-risk free rate of interest?
A
A theoretical rate on a single-period loan that has no expectation of inflation in it.
3
Q
What is the real rate of return?
A
Referring to an investor’s increase in purchasing power (after adjusting for inflation).
4
Q
What is the nominal risk-free rate equation?
A
nominal risk-free rate = real risk-free rate + expected inflation rate
5
Q
What are the 3 types of interest rate risk?
A
Default risk, Liquidity risk, and Maturity risk
