Skripta prva grupa Flashcards
(10 cards)
Annuity-multiple
-payements of the same amount over equal time periods
All sequential payements of the same amount over a certain period of time is defined as -annuity.
Risk premium
The portion of the expected return that can be attributed to the additional risk of an investment. In other words, compensation investors require for additional risk. It is the difference between the expected rate of return on a less risky asset.
Coefficient of variation CV
The risk per unit of return. The smaller the coefficient of variation CV is: lower risk relative to expected return
Also reffered to as the profit and loss statement
presents the results of business operations during a specified period of time. It summarizes the revenues generated and the expenses incurred by the firm during the accounting period.
5. All else equal, in terms of time, investors prefer to receive cash sooner rather than later.
Determinants of market interest rate
Rate of return = risk-free rate + risk premium (IP, DRP, LP, MRP) - Risk-free rate = guaranteed income; changes over time but is still relatively stable
IP and DRP
(1) IP (inflation premium) If the inflation is increasing, it lowers the real rate of return; That is why we take IP into account which is essentially the predicted average rate of inflation over the future life of security.
(2) DRP (default risk premium) Default risk is risk that takes into account the fact that somebody amy not pay off their loan; DRP is determined based on the rating. Bonds who have higher rating (government bonds - AAA) have lower default risk, whereas the higher risk bonds (corporate bonds) have higher DRP. ir on corporate bonds – ir on treasury bonds = DRP
LP and MRP
(3) LP (liquidity premium) Liquid assets convert faster into cash on short-notice. In terms of liquidity: Financial assets > real assets In terms of liquidity for financial assets only: short-term > long-term
(4) MRP (maturity rate premium) Longer the bond takes to mature, more affected it is by the fluctuations in interest rates → MRP for long-term bonds is higher Short-term investment however is viable to reinvestment risk, because we always reinvest at the lower interest rate, therefore the interest income is declining
What is security market line (SML)?
The line that shows the relationship between risk as measured by beta and the required rate of return for an individual securities.
Information efficiency
If these prices reflect existing information and adjust very quickly when new information becomes available, then the financial markets have achieved informational efficiency.
Categories of informational efficiency?
It is typically classified into one of the following three categories:
1) Weak-form efficiency – past price trends don’t predict the future events
2) Semi strong-form efficiency – current prices reflect all known public information
3) Strong-form efficiency – prices account for all information, public and private
