Unit 3

Question 1

The percentage of the principal that a lender charges a borrower for the use of assets

Answer 1

Interest Rate

Question 2

The name for interest rate when used in time value of money calculations

Answer 2

Discount Rate

Question 3

The minimum return or compensation an investor requires in order to invest;

Answer 3

Required Rate of Return

Question 4

The cost to a firm to use an investor’s capital

Answer 4

Cost of Capital

Question 5

The interest earned only on the principal

Answer 5

Simple Interest

Question 6

The interest on the principal plus the interest on earned interest.

Answer 6

Compounding Interest

Question 7

The loss of potential gain from other alternatives when one alternative is chosen.

Answer 7

Opportunity Costs

Question 8

The rate at which the average price level of a basket of chosen goods and services in an economy increases over a period of time.

Answer 8

Inflation

Question 9

The rate at which invested money grows for a certain period of time

Answer 9

Nominal Rate

Question 10

An interest rate that is adjusted to remove the effects of inflation

Answer 10

Real Rate

Question 11

An economic theory developed by Irving Fisher holding that the real interest rate is equivalent to the nominal interest rate minus the expected inflation rate.

Answer 11

Fisher Effect

Question 12

The idea that money that is available at the present time is worth more than the same amount in the future.

Answer 12

Time Value of Money (TVM)

Question 13

The worth of cash flows in terms of the dollar amount in the relative past

Answer 13

Present Value

Question 14

The worth of cash flows in terms of the dollar amount in the relative future.

Answer 14

Future Value

Question 15

Finding a future value given a present value.

Answer 15

Compounding

Question 16

Finding a present value given a future value

Answer 16

Discounting

Question 17

A stream of cash flows of an equal amount paid every consecutive period.

Answer 17

Annuity

Question 18

A series of equal payments made at the end of consecutive periods over a fixed length of time

Answer 18

Ordinary Annuity

Question 19

A series of equal payments made at the beginning of consecutive periods.

Answer 19

Annuity Due

Question 20

A constant stream of identical cash flows that continues forever

Answer 20

Perpetuity

Question 21

Risk that is inherent in the economy as a whole and cannot be diversified away; also called systematic risk or undiversifiable risk

Answer 21

Market Risk

Question 22

Risk that results from factors at a particular firm and can be reduced through diversification; also called nonsystematic risk or idiosyncratic risk.

Answer 22

Firm-specific Risk

Question 23

The probability that changes in interest rates will impact the value of a bond.

Answer 23

Interest Rate Risk

Question 24

The probability of a loss resulting from a borrower’s failure to repay a contractual obligation; also called credit risk.

Answer 24

Default Risk

Question 25

The potential for the decline in the price of a financial security or an asset relative to the market

Answer 25

Price Risk

Question 26

A series of techniques that help reduce the amount of risk a person is exposed to by taking a particular action

Answer 26

Risk Reduction

Question 27

A risk management technique that involves dispersing assets geographically instead of concentrating them in one location

Answer 27

Risk Separation

Question 28

A risk management technique that involves reducing the amount of risk you are exposed to by transferring that risk to another entity

Answer 28

Risk Transfer

Question 29

A decision to take responsibility for a particular risk

Answer 29

Risk Retention

Question 30

A way to manage risk by not performing an activity that may carry risk

Answer 30

Risk Avoidance

Question 31

Risk that is inherent in the economy as a whole and cannot be diversified away; also called market risk or nondiversifiable risk

Answer 31

Systematic Risk

Question 32

A bill issued by the U.S. government as a financial security with no interest and a maturity of less than one year; abbreviated T-bill

Answer 32

Treasury Bill

Question 33

A note issued by the U.S. government as a financial security with a fixed interest rate and a short maturity between 1 and 10 years; abbreviated T-note

Answer 33

Treasury Note

Question 34

A debt instrument (bond) that is issued by the United States government in order to raise capital

Answer 34

Treasury Securities

Question 35

Bonds, bills, and notes issued by the U.S. government; considered to be the highest- quality securities available

Answer 35

U.S Treasuries

Question 36

The annual interest rate that is charged for borrowing money or that is earned through investment.

Answer 36

Annual Percentage Rate

Question 37

The measure of the relationship between two variables that move in relation to each other.

Answer 37

Correlation

Question 38

The stated interest rate of a bond; also known as coupon yield.

Answer 38

Coupon Rate

Question 39

The process of "spreading" your money over many different assets.

Answer 39

Diversification

Question 40

An issue in the process of deciding between multiple options where no option is completely acceptable from an ethical standpoint.

Answer 40

Ethical Dilemma

Question 41

The return over the entire period that an investor owns a financial security.

Answer 41

Holding Period Return

Question 42

Risk that results from factors at a particular firm and can be reduced through diversification; also called firm- specific risk or nonsystematic risk

Answer 42

Idiosyncratic Risk

Question 43

Risk that is inherent in the economy as a whole and cannot be diversified away; also called market risk or systematic risk

Answer 43

Nondiversifiable Risk

Question 44

Risk that results from factors at a particular firm and be reduced through diversification; also called firm-specific risk or idiosyncratic risk

Answer 44

Nonsystematic Risk

Question 45

The money gained or lost on an investment over a certain period of time

Answer 45

Return

Question 46

The compensation for the amount of risk taken on by investors

Answer 46

Risk Premium

Question 47

The rate of return on an investment with no risk

Answer 47

Risk-free Rate

Question 48

A measure of dispersion of possible outcomes about the mean

Answer 48

Standard Deviation