The Time Value of Money & Discount Rates

Question 1

Bond

Answer 1

Debt contract in which the borrower agrees to pay back the principal borrowed at some point in the future and agrees to pay interest on the amount borrowed during the life of the loan.

Question 2

Absolute Priority Rule

Answer 2

Secured creditors (creditors w/liens or mortgages) get paid before unsecured creditors who get paid before shareholders.

Form of creditor protection designed to offset consequences of superior information & control available to equity owners when they manage the business.

Question 3

Inflation

Answer 3

rate which prices are rising & purchasing pwr is falling.

Question 4

Yield Curve

Answer 4

aka term structure of interest rates. Refers to the typical pattern of interest rates where rates get progressively higher the longer the term of lending.

Question 5

Net Present Value Rule

Answer 5

NPV = PV(Benefits) - PV(Costs)
NPV = PV (costs) + PV (benefits)
NPV = C0+C1+C2+…+Ct
Return - Costs = Value of Investment