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19 Cards in this Set
- Front
- Back
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Production Opportunities
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The investment opportunities in productive (cash generating) assets
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Time Preferences for Consumption
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The preferences of consumers for current consumption as opposed to saving for future consumption.
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Risk
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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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Inflation
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The amount by which prices increase over time.
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Real Risk-Free Rate of Interest
r* |
The rate of interest that would exist on default free US Treasury securities if no inflation were expected.
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Nominal (Quoted) Risk-Free Rate
rRF |
The rate of interest on a security that is free of all risk; rFR is proxied by the T-bill rate or the T-bond rate. Includes an inflation premium.
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Inflation Premium
IP |
A premium equal to expected inflation that investors add to the real risk-free rate of return.
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Default Risk Premium
DRP |
The difference between the interest rate on a US Treasury bond and a corporate bond of equal maturity and marketability.
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Liquidity Premium
LP |
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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Interest Rate Risk
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The risk of capital losses to which investors are exposed because of changing interest rates.
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Maturity Risk Premium
MRP |
A premium that reflects interest rate risk.
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Reinvestment Rate Risk
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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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Term Structure of Interest Rates
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The relationship between bond yields and maturities.
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Yield Rate
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A graph showing the relationship between bond yields and maturities.
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"Normal" Yield Curve
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An upward-sloping yield curve.
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Inverted "Abnormal" Yield Curve
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A downward-sloping yield curve.
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Humped Yield Curve
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A yield curve where interest rates on intermediate-term maturities are higher than rates on both short-and long-term maturities.
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Pure Expectations Theory
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A theory that states that the shape of the yield curve depends on investors' expectations about future interest rates.
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Foreign Trade Deficit
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The situation that exists when a country imports more than it exports.
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