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8 Cards in this Set
- Front
- Back
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Term Structure of Interest Rates
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the relationship between a debt's security's rate of return and the length of time until the debt matures
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Unbiased Expectations Theory
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the theory that the shape of term structure of interest rates is determined by an investor's expectations about future interest rates.
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Liquidity Preference Theory
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the theory that the shape of the term structure of interest rates is determined by an investor's additional required interest rate in compensation of additional risks.
-investors require maturity premiums to compensate them for buying securities that expose them to the risk of fluctuating interest rates. |
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Market Segmentation theory
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the theory that the shape of the term structure of interest rates implies that the rate of interest for a particular maturity is determined solely by demand and supply for a given maturity and that is independent of the demand and supply for securities having different maturities.
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7 Risks: Business Risk
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the amount of business risk the firm decides to take on is most critical at the time the business is started.
It affects revenues and earning per share. 4 determinants 1.Stability of the domestic economy 2. exposure and stability of foreign economies 3. sensitivity to business cycle 4. competitive pressures in the firms industry. |
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Operating Risk
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increases when the firm incurs more fixed versus variable cost.
Fixed do not rise and fall w/ revenues |
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Diversifying away risk: Company unique-risk or unsystematic risk
Diversifying= invest in diff securities not just the same ones. 2 types of risks. |
risk related to an investment return that can be eliminated through diversification. its the result of factors that are unique to the particular firm.
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Market risk or Systematic Risk
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risk related to an investment return that cannot be eliminated through diversification.
results from factors that effect all stocks. 2. the risk of a project from viewpoint of a shareholder. This measure takes into account that some of the projects risk will be diversified away as the project is combined with the firms other projects. In addition some of the remaining risk will be diversified away by shareholders as the combine stock with other stocks in their portfolios. |
