Time Value of Money and Basic Capital Budgeting

Question 1

Assumptions pf the perect market (4)

Answer 1

• No taxes
• No transaction costs
• No disgreements (can be asymmetric information)
  -Many Buyers and Sellers

Question 2

Things not required in the perfect-market assumption

Answer 2

• no-inflation
  -no-risk
• time-constant interest rates

Question 3

What type of oncome are bonds?

Answer 3

fixed income

Question 4

maturity (definition)

Answer 4

Time of final payment

Question 5

coupon (definition)

Answer 5

Interim bond payment

Question 6

what is Ct

Answer 6

cash (flow) arriving “sharply” at instant time t

Question 7

return

Answer 7

is the amount of cash it returns

Question 8

net return

Answer 8

return minus investment

Question 9

capital gain

Answer 9

the net return if you ignore all interim payments

Question 10

rate of return formula

Answer 10

r_0,1≡(C_1−C_0)/C_0 ≡C_1/C_0 −1