Quant TVM Flashcards
Annual Percentage Rate
The cost of borrowing expresses as a yearly rate
Annuity
A finite set of level sequential cash flows
Annuity Due
An annuity having a first cash flow that is paid immediately
Cash flow additivity principle
The principle that dollar amounts indexes at the same point in time are additive
Compounding
The process of accumulating interest on interest
Default Risk Premium
An extra return that compensates investors for the possibility that the borrower will fail to make a promised payment at the contracted time and in the contracted amount
Discount
To reduce the value of a future payment in allowance for how far away it is in time; to calculate the present value of some future amount. Also the amount by which and instrument is priced below it’s face (par) value
Effective Annual Rate
The amount by which a unit of currency will grow in a year with interest on interest included
Future Value
The amount to which a payment or series of payments will grow by a stated future date
Inflation premium
An extra return that compensates investors for expected inflation.
Interest Rate
A rate of return that reflects the relationiship between differently dated cash flows; a discount rate
Liquidity Premium
An extra return that compensates investors for the risk of loss relative to an investments fair value if the investment needs to be converted to cash quickly
Maturity premium
An extra return that compensates investors for the increased sensitivity of the market value of debt to a change in market interest rates as maturity is extended
Nominal risk-free interest rate
The sum of the real risk-free interest rate and the inflation premium
Opportunity Cost
The value that investors forgo by choosing a particular course of action; the value of something in its best alternative use
