Financial Risk Management Flashcards
Risk Adverse
Describes managers who demand more return on an investment as risk increases, they expect to be compensated for increased risk
Risk Seeking
Managers who seek reduced return for higher risk
Market/Systematic/Nondiversifiable Risk
exposure of a security or firm to fluctuations in value as a result of operating within an economy, risk inherent
Unsystematic/Firm-Specific/Diversifiable Risk
portion of firms risk that is associated with random causes and can be eliminated through diversification
Interest Rate Risk/Yield Risk
context of financial instruments and represents the exposure of the owner of the instrument to fluctuations in the value of the instrument in response to changes in interest rates
Credit Risk
affects borrowers, companies inability to secure financing
Default Risk
affects lenders, possibility the debtor may not repay the debt
liquidity risk
affects lender(investors), when they desire to sell their security, but cannot do in a timely manner
Price Risk
the exposure the investors have to decline in the value of their individual securities or portfolios
Stated/Nominal Interest Rate
rate of interest charged before any adjustments for compounding or market factors
Effective Interest Rate
the actual finance charges associated with a borrowing after reducing loan proceeds for charges and fees related to a loan origination
Effective Interest Rate Calculation
Amount of interest paid based on loan agreement DIVIDED by net proceeds received
Maturity Risk Premium (MRP)
the compensation that investors demand for exposure to interest rate risk over time, risk increases with the term to maturity
Purchasing Power Risk or Inflation Premium
compensation investors require to bear the risk that price levels will change and affect values or the purchasing power of invested dollars
Liquidity Risk Premium
the additional compensation demanded by lenders for the risk that an investment security cannot be sold on a short term notice
