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FALL > EXAM 2 Finance (CH 4-6) > Flashcards

EXAM 2 Finance (CH 4-6) Flashcards

1
Q

asset

A

sequence of current and future cash flows (sequence not summation, not past cash flows)

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2
Q

future value (FV)

A

amount of money an investment will grow to, over some period of time at a rate. cash value of an investment at some time in the future

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3
Q

future value at end of period t equation

A
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4
Q

compounding

A

The process of accumulating interest in an investment over time to earn more interest.

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5
Q

interest on interest

A

Interest earned on the reinvestment of previous interest payments.

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6
Q

compound interest

A

Interest earned on both the initial principal and the interest reinvested from prior periods.

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7
Q

simple interest

A

Interest earned only on the original principal amount invested.

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8
Q

present value

A

current dollar value of a future cash flow, value of time at 0 on a time line, amount of money that would have to be invested today at a given interest rate over a specified period to equal the future amount

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9
Q

discounting

A

process of finding present values, reverse of compounding

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10
Q

time value of money

A

money can be invested with expectation of earning a positive rate of return

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11
Q

“a dollar received today is worth more than a dollar to be received tomorrow” due to

A
  • todays dollar can be invested so we have one more dollar tomorrow
    -inflation
    -risk (uncertainty of the receipt of that dollar tomorrow)
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12
Q

period (t)

A

length of time

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13
Q

present value (PV)

A

amount of money today or the current value of a future cash flow

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14
Q

Interest Rate (r)

A

the rate you can earn by investing/depoisiting, expressed as a percentage

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15
Q

What are the 4 basic patterns of cash flow?

A

A single amount, an annuity, a perpetuity, a mixed stream

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16
Q

a single amount

A

a lump sum amount either held currently or expected to receive at some future date

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17
Q

an annuity

A

a finite series of equal cash flows that occur at regular intervals

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18
Q

a perpetuity

A

an infinite series of equal cash flows that occur at regular intervals

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19
Q

a mixed stream

A

a stream of unequal periodic cash flows

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20
Q

annuities: these cash flows can be ____ of returns earned on investments, or ____ of funds invested to earn future returns

A

inflows, outflows

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21
Q

ordinary annuity

A

an annuity for which the cash flow occurs at the end of each period

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22
Q

annuity due

A

an annuity for which he cash flow occurs at the beginning of each period

23
Q

in finance, _____ annuity is used more frequently

A

ordinary

24
Q

perpetuity

A

a stream of equal cash flows that occur at regular intervals and go on forever

25
Q

if a perpetuity pays an annual cash flow to CF starting one year from now, the PV of the perpetuity is

A

PV=CF/r

26
Q

mixed stream

A

a stream of uneven periodic cash flows

27
Q

Annual Percentage Rate (APR)

A

simple interest rate for a whole year, without taking compounding interest into account (it only takes simple interest into account)

28
Q

Effective Annual Rate (EAR)

A

also called annual percentage yield, APY, rate earned on an investments for a whole year, taking into account the effects of compounding interest

29
Q

Since APR is a simple interest rate : what is the relationship between APR and rate per period?

A

APR= interest rate per period* number of periods per year

Interest rate per period=APR / number of periods per year

30
Q

Truth in Lending Act of 1968

A

in the US requires that lenders disclose an APR on virtually all consumer loans. this rate can be displayed on a loan document in a prominent and ambiguous way

31
Q

loan amortization

A

common type of loan, which the lender may require the borrower to repay parts of the loan amount over time, called amortizing the loan

32
Q

most common way of amortizing a loan

A

have the borrower make a single, fixed payment (including interest) every period

33
Q

interest rate, time period and cash flow must match

A

ex: annual periods-annual rate-annual cash flows, monthly periods-monthly rate-monthly cash flows, daily periods-daily rate-daily cash flows

34
Q

sign convention (PMT, PV)

A

cash inflows are positive (+), cash outflows are negative (-)

35
Q

loan amortization schedule

A

schedule of equal payments to repay a loan, shows allocation of each loan payment to interest and principal

36
Q

bond

A

a debt contract indicating that a borrower has borrowed a certain amount of money and promised to repay it in the future under clearly defined terms

37
Q

borrower (issuer)

A

promises contractually to make periodic payments to lender

38
Q

lender

A

(bondholder)

39
Q

par value (or face value)

A

amount borrowed by the borrower and the amount owed to the lender on the maturity date

40
Q

maturity date

A

time at which a bond becomes due and the principal must be repaid

41
Q

coupon

A

regular interest payment that the borrower promises to make

42
Q

coupon rate

A

annual coupon divided by the face value

43
Q

bonds are usually called ____ securities because they represent financial claims with promised cashflows of ________ paid at ______.

A

“fixed income”, “known fixed amount”, fixed dates.

44
Q

government bonds (US treasury securities)

A
45
Q

municipal bonds

A

bonds issued by state and local governments,
interest received is tax-exempt at the federal level,
interest usually exempt from state tax in issuing state

46
Q

corporate bonds

A

bonds issued by corporations, typically pay semiannual coupons, par face value is typically $1000.

47
Q

valuation

A

process that links risk and return to determine the worth of an asset

48
Q

cash flows (dollar returns)

A

value of any asset depends on the value of a sequence of current and future cash flows over a specific time period

49
Q

measure of risk

A

determines the required return (discount rate)

50
Q

a ___ level of risk means a _____ required return (discount rate) in the valuation process

A

greater, higher

51
Q

the ___ the risk of a cash flow, the ____ its value

A

greater, lower

52
Q

timing

A

same amount of cash flows occurring at the different times do have different value

53
Q

what is the price of a bond

A

present value of the future cash flows promised, discounted at the appropriate interest rate

54
Q

bond value equations

A

Bond Value = PV(coupons) + PV(par)

Bond Value = PV(annuity) + PV(lump sum)

FALL (6 decks)

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