Equations from B1 Flashcards
As interest rates increase what happens to the value of income
Value decreases
What are the two types of major risk and their diversification
DUNS Diversifiable risk Unsystematic risk (Non-Market & Firm Specific) Non-Diversifiable Risk Systematic Risk (Market Risk)
talk about credit risk, what is increased with it, who it applies to
Credit risk is for borrowers.
credit rating increases means Credit risk increases means cost of borrowing increases
what is default risk and Who does default risk impact? what is the safest insturment in terms of default risk
default risk is the risk that the debtor will not be able to pay the lender…It impacts lenders.
The safetst historically is US Treasury Bonds because they are backed by the government.
What is liquidity risk and who does it impact.
It is the risk of not being able to recover the orginial cost of their asset…like needing to sell a home relaly fast and lowering the price to spark interest.
It impacts the lenders/investors.
Equation for Effective Interest Rate
Interest Per Period / Net Proceeds of Loan
If Numerator isnt give: (Principle x SAR) / # of periods.
Equation for Annual Percentage Rate (APR)
Effective (Periodic Rate) x # periods in a year
Equation for EFFECTIVE ANNUAL interest rate
[1+(stated interest rate/compounding periods per year)^Compounding periods per year-1}
Equation for Simple Interest
Principle * I * N
Compound interest equation
Principle (1+I)^n
Can you control/mmitigate financial risk?
YES BB
How do you mitigate interest rate risk?
Agree to pay a fixed rate while receiving a variable rate
Or derivatives and interest rate swaps
can you mitigate market risk?
not many ways but you can short sell and invest in derivatives that give gains when the market declines
