Chapters 3 - 5 Flashcards
Cash flow
Difference between cash receipts and cash expenditure
Present Value
Today’s value of payment in respect to be received in the future with the interest rate of i
simple loan
A credit market instrument that provides the borrower a certain amount of money, which must be returned by the maturity date along with interest.
Fixed-payment loan
When borrower has to return lender a fixed amount per year , which consists of part of principal and interest rate, for a set number of years.
Coupon bonds
When borrow returns lender a a certain amount of money until date of maturity, when the face value is repaid.
Discount Bonds (zero-coupon bond)
When bonds are bought at a price lower than face value; interest rate is not given.
coupon rate
amount given yearly in relation to final face value
face value ( par value)
final amount repaid in coupon or discount bonds at the end of maturity date.
yield to maturity
interest rate that equates the present value of cashflow with its value today
Perpetuity / Console
Bonds with no maturity date
nominal interest rate
interest rate not adjusted for inflation
real interest rate
interest rate adjusted for inflation
Real terms
real goods and services you can buy
Indexed bonds
bonds with interest and principal adjusted to see future price level
Return
Payments to the owner of a security plus the change in security’s value, expressed as a fraction of its purchase price
Rate of capital gain
change in bond’s price relative to initial purchase price
current yield
An approximation yield to maturity that equals the yearly coupon
duration
average lifetime of a debt security’s stream of payments
interest-rate risk
the possible reduction in returns that is associated with interest rate changes
reinvestment risk
interest rate risk that is associated with the fact that short-term interest rate proceeds must be reinvested at a future interest rate which is uncertain
Asset
piece of property that stores value
Wealth
total resources owned by individual, including all assets
Expected Return
return expected over the next period on an asset relative to alternative assets
risk
degree of uncertainty associated with return
Liquidity
ease/ speed assets can be turned into cash
standard deviation
statistical indicator of an asset’s risk
theory of portfolio choice
how much of an asset people want to hold in their portfolio
demand curve
A curve depicting the relation- ship between quantity demanded and price when all other economic variables are held constant.
supply curve
A curve depicting the relation- ship between quantity supplied and price when all other economic variables are held constant.
excess supply
quantity of bonds supplied exceeds quantity of bond demanded
asset market approach
Determining asset prices using stocks of assets rather than flows
econometric models
models whose equations are estimated with statistical procedures using past data
Fisher Effect
when expected inflation rises, interest rate will rise
