B1-M4 Flashcards
Stated interest rate
(nominal interest rate)
rate of interest charged before any adjustment for compounding or market factors
Effective interest rate
Actual finance charge associated with borrowing after reducing loan proceeds for charges and fees related to the loan
=Actual interest / proceeds minus compensating balance or fees
Effective rate formula
Interest paid (note cost * stated rate)/ Net proceeds (note cost - fees - compensating balance)
Systematic Risk
(Market, Nondiversifiable)
Ex. War, inflation, political events
Unsystematic Risk
(Firm-specific/ Diversifiable risk)
Ex. strikes, lawsuits, regulatory actions
Risk indifferent
increase in risk does not result in an increase in required rate of return
Risk Adverse
increase in risk results in increase of required rate of return
Risk Seeking
increase in risk will decrease managements required rate of return
Business Risk
risks associated with the unique circumstances of a company
Put option
Sell a specific security at a fixed price and time
Derivative
Derives its value from the performance of another asset or financial contract
Interest rate swap agreement
- hedging risk associated with interest rate fluctuations
- switches floating-rate to fixed-rate
Credit risk
opportunity that the rates associated with debt will be changed unfavorably or that financing will be denied all together
