Chapter 3: What Do Interest Rates Mean and What Is Their Role in Valuation?

Question 1

3. Simple Present Value

Answer 1

Question 2

3. Fixed Payment Loan

Answer 2

Question 3

3. Coupon Bond

Answer 3

Question 4

3. Perpetuity/Consol

Answer 4

Question 5

3. Discount Bond

Answer 5

Question 6

3. Fisher Equation

Answer 6

Question 9

3. Return

Answer 9

Question 11

3. Calculating Duration

Answer 11

Question 14

3. Duration and Interest-Rate Risk

Answer 14

Question 15

3. Porfolio Duration

Answer 15

Question 17

3. Yield to Maturity

Answer 17

The interest rate that equates the present value of payments received from a credit market instrument with its value today.

Question 18

3. Rate of Return

Answer 18

The payments to the owner of a security plus the change in the security’s value, expressed as a fraction of its purchase price.

Question 20

3. Rate of Captal Gain

Answer 20

The change in a security’s price relative to the initial purchase price.

Question 22

3. Interest-Rate Risk

Answer 22

The possible reduction in returns that is associated with changes in interest rates. Long term bonds have a higher interest-rate risk than short term bonds.

Question 23

3. Reinvestment Risk

Answer 23

The interest-rate risk associated with the fact that the proceeds of short-term investments must be reinvested at a future interest rate that is uncertain.