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14 Cards in this Set
- Front
- Back
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Lump sum
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a single cash flow
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present value
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the value today of a cash flow to be received or paid in the future
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future value
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is the value in the future of cash flows received or paid today
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Future value of lump sum equation
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FV=PV(1+i)
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Population
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is the collection of all possible individuals
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Sample
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a portion or subset of a population that is used to estimate characteristics
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Interpret interest rates
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Equilibrium
interest rates are the required rate of return for a particular investment, in the sense that the market rate of return is the return that investors and savers require to get them to willingly lend their funds. Interest rates are also referred to as discount rates |
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nominal risk-free rate
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nominal risk-free rate = real risk-free rate + expected inflation rate
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Securities types of risk:
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Default risk, Liquidity risk, Maturity risk.
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real risk-free rate
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is a theoretical rate on a single-period loan that has no
expectation of inflation and dafault risk and liquidty risk and maturity risk |
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real rate of return
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an investor's increase in purchasing power (after adjusting for inflation).
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nominal risk-free rate=
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real risk-free rate + expected inflation rate
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EAR ( time value of money)
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effective annual rate
represents the annual rate of return actually being earned after adjustments have been made for different compounding periods. |
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EAR ( time value of money) formula
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EAR (1 + periodic rare)m - 1
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