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
Ordinary Annuity
An annuity with a first cash flow that is paid one period from the present
Perpetuity
A perpetual annuity or a set of never ending level sequential cash flows, with the first cash flow occurring one period from now. A bond that does not mature.
Present Value (PV)
The present discounted value of future cash flows: for assets, the present discounted value of cash the future net cash inflows that the asset is expected to generate; for liabilities, the present discounted value of the future net cash outflows that are expected to be required to settle the liabilities.
Principal
The amount of funds originally invested in a project or instrument; the face value to be paid at maturity
Quoted Interest Rate
A quoted interest rate that not account for compounding within the year.
Real risk-free interest rate
The single period interest rate for a completely risk-free security if no inflation were expected
Rule of 72
The principle that the approximate number of years neccesarry for an investment to double is 72 divided by the stated interest rate
Simple Interest
The interest earned each period on the original investment. Interest calculated on the principal only
Stated annual interest rate
A quoted interest rate that not account for compounding within the year
Time value of money
The principle governing equivalance relationships between cash flows with different dates
