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14 Cards in this Set

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Lump sum
a single cash flow
present value
the value today of a cash flow to be received or paid in the future
future value
is the value in the future of cash flows received or paid today
Future value of lump sum equation
FV=PV(1+i)
Population
is the collection of all possible individuals
Sample
a portion or subset of a population that is used to estimate characteristics
Interpret interest rates
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
nominal risk-free rate
nominal risk-free rate = real risk-free rate + expected inflation rate
Securities types of risk:
Default risk, Liquidity risk, Maturity risk.
real risk-free rate
is a theoretical rate on a single-period loan that has no
expectation of inflation and dafault risk and liquidty risk and maturity risk
real rate of return
an investor's increase in purchasing power (after adjusting for inflation).
nominal risk-free rate=
real risk-free rate + expected inflation rate
EAR ( time value of money)
effective annual rate
represents the annual rate of return actually being
earned after adjustments have been made for different compounding periods.
EAR ( time value of money) formula
EAR (1 + periodic rare)m - 1
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