FINC 425 exam 1
What is generally the fair price of a financial asset? - Answer- the present value of all expected future cash flows What is time "1" - Answer- the end of period 1 (also the beginning of period 2) How are we able to find PV to infinity? - Answer- because the further into the future the CFs get, the less value they have (their values approach zero) What does APR not account for? - Answer- compound interest APR= - Answer- Annual Percentage Rate EAR= - Answer- effective annual rate What happens if price is greater than PV? - Answer- investors will not buy, supply/demand will drive the price down Bonds: - Answer- instruments for institutions to raise debt capital by borrowing through the public financial markets Lenders - Answer- purchase the *issuer's* bonds Issuers - Answer- sell bonds to *lenders* Bond price - Answer- amount paid by the bondholder (in primary market, the amount borrowed by the issuer) Maturity - Answer- expiration date of the bond/ date of bond's last cash flow Face value - Answer- The amount the bondholder will be repaid at maturity. Selli
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