(R6) Quantitative Methods: TMV

Question 1

Interest Rates (r) can be thought of in 3 ways

Answer 1

1. Required rate of return
2. Discount rate
3. Opportunity cost

Question 2

Required rate of return

Answer 2

minimum rate of return an investor must receive in order to accept the investment (AKA interest rate)

Question 3

Discount Rate

Answer 3

the rate at which some future value is discounted to arrive at a value today (AKA interest rate)

Question 4

Opportunity cost

Answer 4

value that investors forgo by choosing a particular course of action (aka interest rate)

Question 5

Suppose i lend you $1000 for one year, i will want the following (type of premiums):

Answer 5

1. real risk-free rate
2. inflation premium
3. default risk premium
4. liquidity premium
5. maturity premium

Question 6

Real risk-free rate

Answer 6

Single period interest rate for a completely risk-free security if no inflation were expected.

Question 7

Nominal risk-free interest rate =

Answer 7

Real risk free interest rate + inflation premium

These are the rates quoted in the market (i.e. bank)

Question 8

FV of a single cash flow =

Answer 8

PV (1+r) ^n

Question 9

PV of a single cash flow =

Answer 9

FV / (1+r) ^n

Question 10

Continuous compounding formula

Answer 10

e^r*n

Question 11

Effective annual rate (EAR) =

Answer 11

This is the stated annual rate quoted in terms of periods

(1 + periodic interest rate)^m - 1

Question 12

Annuity

Answer 12

a finite set of level sequential cash flows

Question 13

Ordinary annuity

Answer 13

payment is made at the end of the first year

Question 14

Annuity due

Answer 14

payment is made at the beginning of the first year

Question 15

Present value of a perpetuity =

Answer 15

A / r

A = the amount paid per year forever

Question 16

EAR formula for continuous compounding

Answer 16

= e^r - 1

Question 17

What kind of rate premiums have no impact on treasury notes?

Answer 17

Default risk premium