CFA 1 QM Flashcards
required rate of return
the return that investors and savers require to get them to willingly lend their
funds.
discount rates
If an individual can borrow funds at an interest rate of 10%, then that
individual should discount payments to be made in the future at that rate in order to get their
equivalent value in current dollars or other currency.
opportunity cost
If the market rate of interest on 1-year
securities is 5%, earning an additional 5% is the opportunity forgone when current
consumption is chosen rather than saving
real risk-free rate
theoretical rate on a single-period loan that has no
expectation of inflation in it
nominal risk-free rates
T-bill rates are nominal risk-free rates
because they contain an inflation premium
nominal risk-free rate = real risk-free rate + expected inflation rate
Default risk
The risk that a borrower will not make the promised payments in a timely
manner.
Liquidity risk
The risk of receiving less than fair value for an investment if it must be
sold for cash quickly.
Maturity risk
Longer maturity
bonds have more maturity risk than shorter-term bonds and require a maturity risk
premium.
effective annual rate (EAR) / effective annual yield (EAY)
The rate of interest that investors
actually realize as a result of compounding
EAR Formula
EAR = (1 + periodic rate)^m – 1
Future value
amount to which a current deposit will grow over time when it is placed in
an account paying compound interest
Present Value
today’s value of a cash flow that is to be received at some point in
the future.
annuity
stream of equal cash flows that occurs at equal intervals over a given period.
ordinary annuities
cash flows that
occur at the end of each compounding period.
annuity due
payments or receipts occur at the beginning of each period
