Unit 3 Flashcards
The percentage of the principal that a lender charges a borrower for the use of assets
Interest Rate
The name for interest rate when used in time value of money calculations
Discount Rate
The minimum return or compensation an investor requires in order to invest;
Required Rate of Return
The cost to a firm to use an investor’s capital
Cost of Capital
The interest earned only on the principal
Simple Interest
The interest on the principal plus the interest on earned interest.
Compounding Interest
The loss of potential gain from other alternatives when one alternative is chosen.
Opportunity Costs
The rate at which the average price level of a basket of chosen goods and services in an economy increases over a period of time.
Inflation
The rate at which invested money grows for a certain period of time
Nominal Rate
An interest rate that is adjusted to remove the effects of inflation
Real Rate
An economic theory developed by Irving Fisher holding that the real interest rate is equivalent to the nominal interest rate minus the expected inflation rate.
Fisher Effect
The idea that money that is available at the present time is worth more than the same amount in the future.
Time Value of Money (TVM)
The worth of cash flows in terms of the dollar amount in the relative past
Present Value
The worth of cash flows in terms of the dollar amount in the relative future.
Future Value
Finding a future value given a present value.
Compounding
Finding a present value given a future value
Discounting
A stream of cash flows of an equal amount paid every consecutive period.
Annuity
A series of equal payments made at the end of consecutive periods over a fixed length of time
Ordinary Annuity
A series of equal payments made at the beginning of consecutive periods.
Annuity Due
A constant stream of identical cash flows that continues forever
Perpetuity
Risk that is inherent in the economy as a whole and cannot be diversified away; also called systematic risk or undiversifiable risk
Market Risk
Risk that results from factors at a particular firm and can be reduced through diversification; also called nonsystematic risk or idiosyncratic risk.
Firm-specific Risk
The probability that changes in interest rates will impact the value of a bond.
Interest Rate Risk
The probability of a loss resulting from a borrower’s failure to repay a contractual obligation; also called credit risk.
Default Risk
The potential for the decline in the price of a financial security or an asset relative to the market
Price Risk
A series of techniques that help reduce the amount of risk a person is exposed to by taking a particular action
Risk Reduction
A risk management technique that involves dispersing assets geographically instead of concentrating them in one location
Risk Separation
A risk management technique that involves reducing the amount of risk you are exposed to by transferring that risk to another entity
Risk Transfer
A decision to take responsibility for a particular risk
Risk Retention
A way to manage risk by not performing an activity that may carry risk
Risk Avoidance
Risk that is inherent in the economy as a whole and cannot be diversified away; also called market risk or nondiversifiable risk
Systematic Risk
A bill issued by the U.S. government as a financial security with no interest and a maturity of less than one year; abbreviated T-bill
Treasury Bill
A note issued by the U.S. government as a financial security with a fixed interest rate and a short maturity between 1 and 10 years; abbreviated T-note
Treasury Note
A debt instrument (bond) that is issued by the United States government in order to raise capital
Treasury Securities
Bonds, bills, and notes issued by the U.S. government; considered to be the highest- quality securities available
U.S Treasuries
The annual interest rate that is charged for borrowing money or that is earned through investment.
Annual Percentage Rate
The measure of the relationship between two variables that move in relation to each other.
Correlation
The stated interest rate of a bond; also known as coupon yield.
Coupon Rate
The process of “spreading” your money over many different assets.
Diversification
An issue in the process of deciding between multiple options where no option is completely acceptable from an ethical standpoint.
Ethical Dilemma
The return over the entire period that an investor owns a financial security.
Holding Period Return
Risk that results from factors at a particular firm and can be reduced through diversification; also called firm- specific risk or nonsystematic risk
Idiosyncratic Risk
Risk that is inherent in the economy as a whole and cannot be diversified away; also called market risk or systematic risk
Nondiversifiable Risk
Risk that results from factors at a particular firm and be reduced through diversification; also called firm-specific risk or idiosyncratic risk
Nonsystematic Risk
The money gained or lost on an investment over a certain period of time
Return
The compensation for the amount of risk taken on by investors
Risk Premium
The rate of return on an investment with no risk
Risk-free Rate
A measure of dispersion of possible outcomes about the mean
Standard Deviation
