Rates and Returns Flashcards
What is an interest rate or yield?
a rate of return that reflects the relationship between differently-dated cash flows.
What is “opportunity cost”?
The value that investors forgo by choosing a particular course of action; that value of something in its best alternative use.
What is the “real risk-free interest rate”?
the single-period interest rate for a completely risk-free security if no inflation were expected
What is an “inflation premium”?
an extra return that compensates investors for expected inflation.
What is “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.
What is the “Liquidity Premium”?
An extra return that compensates investors for the risk of loss relative to an investment’s fair value if investment needs to be converted to cash quickly.
What is the “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.
What is the “Holding Period Return”?
The return that an investor earns during a specific holding period.
A synonym for total return.
What is “Cost Averaging”?
The periodic investment of a fixed amount of money
What is a “Trimmed Mean”?
A mean computed after excluding a stated small percentage of the lowest and highest observations.
What is a “money-weighted return”?
the IRR of a portfolio, taking account all cash flows.
What is a “continuously compounded return”?
The natural logithm of 1+ the holding period return.
OR
the natural logarithm of the end price over the beginning price.
