Flashcards in BPM: Financial Risk Management Deck (23):

1

## Risk Averse

### Managers that anticipate greater return for greater risk

2

## Risk Indifferent

### describes a manager who is neutral with regard to the return associated with a particular investment. Typically, the amount of a risk free rate of return associated with an investment of a given amount compared to a higher return associated with higher risk is viewed as having equal value.

3

## Risk seeking behavior

### behavior describes managers who seek reduced return for higher risk

4

## Liquidity risk

### desire to sell their security, but cannot do so in a timely manner or when material price concessions have to be made to do so.

5

## Interest rate risk

### is the fluctuation in the value of a "financial asset" when interest rates change

6

## Purchasing power risk

### risk that price levels will change and affect asset values (mostly real estate).

7

## Market Risk

### The exposure of a security or firm to fluctuations in value as a result of operating within an economy is referred to as market risk.

8

## Credit Risk

### Affects borrowers. If Risk increases then Interest rate will increase

9

## Default Risk

### Affects lenders. may not repay the principal or interest due

10

## Stated Interest Rate (Definition)

### represents the rate of interest charged before any adjustment for compounding or market factors. Shown in the agreement of indebtedness

11

## Computation Of Return

### compensates investors and creditors for assumed risk

12

## Effective Interest Rate

### Actual finance charge associated with a borrowing after reducing loan proceeds for charges and fees related to a loan origination

13

##
Computation of Effective Interest Rates

(Look at Page 40 for example)

### Effective Interest Rates are computed by dividing the amount of interest paid based on the loan agreement by the net proceeds received.

14

##
Annual Percentage Rate (APR)

(Look at Page 40 for example)

### Effective Periodic Rate X # of compounding periods

15

## Effective Annual Interest Rate

###
=[1+(i/p)]p-1

i= Stated interest rate

p = compounding periods per year

16

## Compound Interest

### Interest paid only on the original amount of principal without regard to compounding

17

## Compound Interest Formula

###
FVn= P(1+i)n

P= Original Price

i= Interest rate

n= Number of periods

18

## Maturity Risk Premium

### the compensation that investors demand for exposure to interest rate risk over time

19

## Purchasing Power Risk or Inflation Premium

### compensation investors require to bear the risk that price levels will change and affect asset values or the purchasing power of invested dollars

20

## Liquidity Risk Premium

### The additional compensation demanded by lenders

21

## Default Risk Premium

### additional compensation demanded by lenders for bearing the risk that the issuer of the security will fail to pay interest and/or principal due on a timely basis

22

## Subjective Probability

### based on an individuals belief about the likelihood that a given event will occur

23