What is the required rate of return?
The market rate of return is the return that investors and savers require to get them to willingly lend their funds.
What is a discount rate?
Interchangeable with interest rate, required rate of return.
What is the real risk-free rate?
interest on a single period loan that has no expectation of inflation in it.
US T-bills are nominal risk-free rates because they have an inflation premium.
What is default risk?
What is liquidity risk?
What is maturity risk?
Default risk - risk the borrower will not make the promised payments
Liquidity risk - risk of receiving less than fair value for an investment if sold for cash quickly.
Maturity risk - volatility longer the maturity of the loan.
What is the formula for required rate of return on a security?
nominal risk free rate + default risk premium + liquidity risk premium + maturity risk premium
what is the effective annual rate?
The rate of interest that investors actually realize as a result of compounding
What is the formula for effective annual rate?
EAR = [(1 + periodic rate) ^(m) ]-1
periodic rate = stated annual rate / m
m = the number of compounding periods per year.