C3

Question 1

NPV Decision rule

Answer 1

Compute everything to PV
=PV(Benefits)+PV(Costs)

When making an investment decision, take the alternative with the highest NPV
Assuming there is no constraints

Question 2

Net investment value

Answer 2

Future-today

Question 3

Value of investment

• today
• future

Answer 3

• ($today) / ($1+Rf)/($today

- ($today) x ($1+Rf)/($today)

Question 4

Risk free rate

Answer 4

The investment rate at which money can be borrowed or lent without risk for a given period

• Interest rate: 1+rf
• Discount rate: 1/1+rf

Question 5

Interest rate

Answer 5

The sum the bank pays

Question 6

Arbitrage

Answer 6

The practice of buying or selling equivalent goods in different markets to take advantage of the price difference

Question 7

Normal markets

Answer 7

In competitive markets where there is no arbitrage opportunities

Question 8

Law of one price

Answer 8

If equivalent investments opportunities trade simultaniously in different competative markets, they they must trade at the same price in those different markets. Arbitrage equalizes prices

Question 9

No arbitrage of a security

Answer 9

P(security)=PV(of all cash flows in that security)

Question 10

Seperation principle

Answer 10

Security transactions in a normal market neither create nor destroy value on their own

Question 11

Value additivity

Answer 11

P(C)=P(A+B)=P(A)+P(B)