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25 Cards in this Set
- Front
- Back
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finance |
the field that studies how people make decisions regarding the allocation of resources over time and the handling of risk |
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present value |
the amount of money today that would be needed (using prevailing interest rates) to produce a given future amount of money |
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present value equation |
X / (1+r) ^n |
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future value |
the amount of money in the future that an amount of money today would yield given prevailing interest rates |
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Future value equation |
(1=r) ^n |
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X= |
principal |
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r= |
interest rate |
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N= |
number of periods |
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Example of present value wording |
If you want $50,000 in 8 years, how much do you need to invest at an 8% interest rate |
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Example of future value wording |
How much will $20,000 be worth in 20 years? |
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risk averse |
the dislike of uncertainty- you dislike bad things more than you like good things |
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Markets for insurance encounter 2 problems that impede the ability to spread risk |
adverse selection-high risk person is more likely to buy insurance than a low risk person
moral hazard-after people buy insurance, they have less incentive to be careful |
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with insurance, higher risk leads to |
higher premium |
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with insurance, lower risk leads to |
lower premium |
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the more risk you have, the more |
opportunities you have for return |
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diversification |
the reduction of risk by replacing a single risk with a large number of smaller, unrelated risks |
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fundemental analysis |
the study of a company's accounting statements and future prospects to determine its value |
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efficient market hypothesis |
asset prices reflect all publicly available info about the value of an asset |
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futures contract |
agreement to buy/sell at some point in the future |
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options contract |
purchasing time |
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maturity risk |
the longer time period of investment, the more risk you have |
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default risk |
the likelihood of getting paid back |
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inflation risk |
inflation lowers the rate of return |
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Fishers equation |
Real Interest rate=Nom interest rate - inflation |
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Asset valuation is composed of these 4 things |
fundemental analysis efficient markets random walk irrationality |
