1: TVM Flashcards
When liquidity is low, what happens to the interest rate?
The interest rate increases, to represent the liquidity premium.
Since the investor is not easily able to get their cash, there is a premium, increasing the interest rate.
When default risk is high, what happens to the interest rate?
The interest rate increases
(default premium)
The EAR = stated rate when?
the compounding periods equals 1 (annual)
Represents the annual rate of return actually being earned after adjustments for compounding periods have been made
EAR
The EAR considers the effects of compounding on ______
return on investment (ROI)
Investors increase in purchasing power
real rate of return
adjusted to remove the effects of inflation
real rate of return
Investors require interest on a security that is calculated as:
nominal
+ liquidity premium
+default premium
+ maturity premium
Rate that contains inflation premium
nominal interest rate
US T-bills are an example of?
nominal risk-free interest rates
Stream of equal CF that occurs at equal intervals, over a given period
annuity
Pays fixed amount of money at set intervals, over an infinite period of time
perpetuity
CF additivity principle: PV of any stream of CF = ______
sum of PV of the CFs
Real risk-free interest rate is a _____ rate, that has_______.
theoretical rate
has no expectation of inflation
Interest rates have many different names that include:
discount rates
opportunity cost
required rate of return
cost of capital
