Chapters 3 - 5

Question 1

Cash flow

Answer 1

Difference between cash receipts and cash expenditure

Question 2

Present Value

Answer 2

Today’s value of payment in respect to be received in the future with the interest rate of i

Question 3

simple loan

Answer 3

A credit market instrument that provides the borrower a certain amount of money, which must be returned by the maturity date along with interest.

Question 4

Fixed-payment loan

Answer 4

When borrower has to return lender a fixed amount per year , which consists of part of principal and interest rate, for a set number of years.

Question 5

Coupon bonds

Answer 5

When borrow returns lender a a certain amount of money until date of maturity, when the face value is repaid.

Question 6

Discount Bonds (zero-coupon bond)

Answer 6

When bonds are bought at a price lower than face value; interest rate is not given.

Question 7

coupon rate

Answer 7

amount given yearly in relation to final face value

Question 8

face value ( par value)

Answer 8

final amount repaid in coupon or discount bonds at the end of maturity date.

Question 9

yield to maturity

Answer 9

interest rate that equates the present value of cashflow with its value today

Question 10

Perpetuity / Console

Answer 10

Bonds with no maturity date

Question 11

nominal interest rate

Answer 11

interest rate not adjusted for inflation

Question 12

real interest rate

Answer 12

interest rate adjusted for inflation

Question 13

Real terms

Answer 13

real goods and services you can buy

Question 14

Indexed bonds

Answer 14

bonds with interest and principal adjusted to see future price level

Question 15

Return

Answer 15

Payments to the owner of a security plus the change in security’s value, expressed as a fraction of its purchase price

Question 16

Rate of capital gain

Answer 16

change in bond’s price relative to initial purchase price

Question 17

current yield

Answer 17

An approximation yield to maturity that equals the yearly coupon

Question 18

duration

Answer 18

average lifetime of a debt security’s stream of payments

Question 19

interest-rate risk

Answer 19

the possible reduction in returns that is associated with interest rate changes

Question 20

reinvestment risk

Answer 20

interest rate risk that is associated with the fact that short-term interest rate proceeds must be reinvested at a future interest rate which is uncertain

Question 21

Asset

Answer 21

piece of property that stores value

Question 22

Wealth

Answer 22

total resources owned by individual, including all assets

Question 23

Expected Return

Answer 23

return expected over the next period on an asset relative to alternative assets

Question 24

risk

Answer 24

degree of uncertainty associated with return

Question 25

Liquidity

Answer 25

ease/ speed assets can be turned into cash

Question 26

standard deviation

Answer 26

statistical indicator of an asset’s risk

Question 27

theory of portfolio choice

Answer 27

how much of an asset people want to hold in their portfolio

Question 28

demand curve

Answer 28

A curve depicting the relation- ship between quantity demanded and price when all other economic variables are held constant.

Question 29

supply curve

Answer 29

A curve depicting the relation- ship between quantity supplied and price when all other economic variables are held constant.

Question 30

excess supply

Answer 30

quantity of bonds supplied exceeds quantity of bond demanded

Question 31

asset market approach

Answer 31

Determining asset prices using stocks of assets rather than flows

Question 32

econometric models

Answer 32

models whose equations are estimated with statistical procedures using past data

Question 33

Fisher Effect

Answer 33

when expected inflation rises, interest rate will rise