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79 Cards in this Set
- Front
- Back
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an important tool used in time value analysis, it is graphically represented used to show the timing of cash flows
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time line
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the amount to which a cash flow or series of cash flows will grow over a given period of time when compounded at a given interest rate
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Future Value
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the value today of a future cash flow or series of cash flows
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present value
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the arithimatic prosess of determining the final value of a cash flow or series of cash flows when compound interest is applied
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compounding
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occurs when interest is earned on prior periods interest
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compound interest
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occurs when interest is not earned on interest
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simple interest
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the rate of return you could earn on an alternative investment of similar risk
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opportunity cost
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the process of finding the present value of a cash flow or series of cash flows, discounting is the reverse of compounding
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discounting
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a series of equal payment at fixed intervals for a specified numer of periods
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annuity
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an annuity whose payments occur at the end of each period
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ordinary (deffered) annuity
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An annuity whose payments occur at the begining of each period
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Annuity due
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The future value value of an annuity over N periods
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FVAn
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The present value of an annuity of N periods
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PVAn
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a perpetual bond issed by the british govt to consolidate past debts, in general, any perpetual bond
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Consol
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A stream of equal payments at fixed intervals expected to continue forever
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Perpetuity
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A series of cash flows where the amount varies from one period to the next
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Uneven (nonconsistient) cash flows
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this term designates equal cash flows coming at regular intervals
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Payment (PMT)
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This term designates a cash flow thats not part of an annuity
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Cash Flow (CFt)
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The arithimatic process of determining the final value of a cash flow or series of cash flows when inrterest is added once a year
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Annual Compounding
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The arithimatic process of determining the final value of a cash flow or series of cash flows when interest is added twice a year
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Semiannual Compounding
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The contracted, or quoted, or stated, interest rate
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Nominal (quoted, or stated) interest rate
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The poeriodic rate times the number of periods per year
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Annual Percentage rate (APR)
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The annual rate of interest actually being earned, as opposed to the quoted rate. also called the "equivalent annual rate"
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Effective (equivalent) annual rate (EFF% or EAR)
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A loan that is repaid in equal payments over its live
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Amorized loan
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A table showing precisely how a loan will be repaid. It gives the required payment on each payment date and a breakdown of the payment, showing how much interest and how much is repayment of principle
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Amortization schedule
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a long term debt instrument
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bond
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bonds issued by the federal govt, sometimes refered to as govt bonds
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treasury bonds
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bonds iddued by corporations
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corporate bonds
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bonds issued by state and local govts
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municipal bonds
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bonds issued by either forign govts or forign corporations
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foreign bonds
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teh face value of a bond
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par value
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the specified number of dollars interest paid each year
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coupon payment
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the stated annual interest rate on a bond
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coupon interest rate
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a bond whose interest rate fluctuates with shifts in the general level of interest rates
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floating rate bond
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a bond that pays no annual interest but is sold at a discount below par, thus providing compensation to investors in the form of capital appreciation
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zero coupon bond
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any bond originally offered at a price below its par value
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Original issue Discount bond
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a specified date on which the par value or a bond must be repaid
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Maturity Date
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the number of years to maturity at the time a bond is issued
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original maturity
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a provision in a bond that gives the issuer the right to redeem the bonds under specified terms prior to the normal maturity date
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call provision
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a provion in a bond contract that requires the issuer to retire a portion of the bond issue each year
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sinking fund provision
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a bond that is exchangeable, at the option of the holder, for the issuing firms common stock
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convertable bond
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a long term option to buy a stated number of shares of common stock at a specified price
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warrant
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a bond with provisions that allow its investor to sell it back to the company prior to maturity ate a prearranged price
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putable bond
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a bond that pays interest only if it is earned
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income bond
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a bond that has interest payments based on an inflation index so as to protect the holder from inflation
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Indexed (purchasing power) bond
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A bond that sells below its par value, occurs whenever the going rate of interest is above the coupon rate
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discount bond
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a bond that sells above its par value, occuurs whenever the going rate of interest is below the coupon rate
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premium bond
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the rate of return earned on a bond if it is held to maturity
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Yield to maturity (YTM)
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the rate of return earned on a bond if it is called before its maturity date
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yield to call (YTC)
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the annual interest payment on a bond divided by a bonds current price
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current yield
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the risk of a decline in a bonds price due to an increase in interest rates
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Interest rate (Price) Risk
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the risk that a decline in interest rates will lead to a decline in income from a bond portfollio
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Reinvestment rate risk
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The period of time an investor plans to hold a particular investment
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Investment Horizon
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A bond backed by fixxed assets. First mortgadge bonds are senior in priority to claims of second mortgadge bonds
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mortgage bonds
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a formal agreement between the issuer and the bondholders
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Indenture
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A long term bond that is not secured by a morgage on specific property
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debenture
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a bond having a claim on assets only ater the senior debt has been paid off in the event of liquidation
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subordinated debenture
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bonds rated triple-b or higher, many banks and other institutional investores are permitted by law to hold only investment grade bonds
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investment grade bonds
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a high risk, high yield bond
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junk bonds
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the investment opportunities in productive (cash generating) assets
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production opportunities
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the preferences of consumers for current consumption as opposed to saving for future consumption
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Time preferences for consumption
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in a financial market context, the chance that an investment will provide a low or negative return
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risk
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the amount by which prices increase over time
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inflation
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the rate of interest that would exist on default free us treasury securities if no inflation were expected
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Real risk free rate of interest, r*
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a premium equal to expected inflation that investors add to the real risk free rate of return
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Inflation Premium (IP)
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the difference between the interest rate on a us treasury bond and a corporate bond of equal maturity and marketability
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default risk premium (DRP)
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a premium added to the equilibrium interest rate on a security if that security cannot be converted to cash on short notice and at close to its fair market value
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Liquidity Premium (LP)
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the risk of capital losses to which investors are exposed because of changing interest rate
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interest rate risk
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a premium that reflects interest rate risk
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maturity risk premium (MRP)
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the risk that a decline in interest rates will lead to lower income when bonds mature and funds are reinvested
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Reinvestment rate risk
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the relationship between bond yields and maturities
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term structure of interest rates
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a graph showing the relationship between bond yields and maturities
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yield curve
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an upward sloping yield curve
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normal yield curve
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a downward sloping yield curve
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Inverted abnormal yield curve
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a yield curve where interest rates on medium term maturities are higher than rates on both short and long term maturities
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humped yield curve
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a theory that states that the shape or the yield curve depends on investors expectations about future interest rates
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pure expectations theory
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the situation that exists when a country imports more than it exports
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foreign trade deficit
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the risk that arises from investing or doing business in a particular country
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country risk
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the risk that exchange rate changes will reduce the number of dollars provided by a given amount of a foreign currency
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exchange rate risk
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