Exam 2 Cob 300B Questions With Answers

Exam 2 COB 300B QUESTIONS WITH |\ |\ |\ |\ |\ |\




ANSWERS

Future Value - CORRECT ANSWERS ✔✔The effect of compounding
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is small for a smallnumber of periods, but increases as the
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number ofperiods increases |\ |\




TIme Line - CORRECT ANSWERS ✔✔helps you visualize what's
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happening in a particular problem |\ |\ |\ |\




Future Value - CORRECT ANSWERS ✔✔The amount of to which a
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cash flow or serves of cash floes will grow over a given period of
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time when compounded at a given interest rate.
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Present Value - CORRECT ANSWERS ✔✔The value today of a
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future cash flow or series of cash flows
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Compounding - CORRECT ANSWERS ✔✔The arithmetic process of |\ |\ |\ |\ |\ |\ |\


determining the final value of a cash flow or series of cash flows
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when compound interest is applied.
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Compound Interest - CORRECT ANSWERS ✔✔occurs when |\ |\ |\ |\ |\ |\ |\


interest is earned on prior periods' interest
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Simple Interest - CORRECT ANSWERS ✔✔occurs when interest is
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not earned on interest
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,Discounting - CORRECT ANSWERS ✔✔The process of finding the |\ |\ |\ |\ |\ |\ |\ |\ |\


present value of a cash flow or a series of cash flows: discounting
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is the reverse of compounding.
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Annuity - CORRECT ANSWERS ✔✔A series of equal payments at
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fixed intervals for a specified number of periods.
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Ordinary (or deferred) annuity - CORRECT ANSWERS ✔✔An
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annuity whose payments occur at the end of each period.
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Annuity Due - CORRECT ANSWERS ✔✔an annuity whose
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payments occur at the beginning of each period |\ |\ |\ |\ |\ |\ |\




Perpetuity - CORRECT ANSWERS ✔✔A stream of equal payment|\ |\ |\ |\ |\ |\ |\ |\ |\


at fixed interval expected to continue forever
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Uneven, or non-constant, cash flows - CORRECT ANSWERS ✔✔A
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series of cash flows where the amount varies from one period to
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the next. |\




Payment (PMT) - CORRECT ANSWERS ✔✔this term designates
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equal cash flows coming at regular intervals
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Cash flow - CORRECT ANSWERS ✔✔This term designates a cash
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flow that's not part of an annuity.
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,annual compunding - CORRECT ANSWERS ✔✔The arithmetic
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process of determining the final value of a cash flow or series of
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cash flows when interest is added once a year.
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semiannual compounding - CORRECT ANSWERS ✔✔The |\ |\ |\ |\ |\ |\


arithmetic process of determining the final value of a cash flow
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or series of cash flows when interest is added twice a year.
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Nominal Interest Rate - CORRECT ANSWERS ✔✔The contracted
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interest rate. |\




Effective annual rate - CORRECT ANSWERS ✔✔The annual rate of
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interest actually being earned, as opposed to the quoted rate.
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Amortized Loan - CORRECT ANSWERS ✔✔a loan that is repaid in
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equal payments over its life
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Production Opportunities - CORRECT ANSWERS ✔✔The|\ |\ |\ |\ |\ |\


investment opportunities in productive (cash-generating) assets.
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Time Preferences for Consumption - CORRECT ANSWERS ✔✔Time
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preferences of consumers for current consumption as opposed to
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saving for future consumption.
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Risk - CORRECT ANSWERS ✔✔in a financial market context, the
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chance that an investment will provide a low or negative return
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, Inflation - CORRECT ANSWERS ✔✔The amount by which prices
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increase over time |\ |\




r - CORRECT ANSWERS ✔✔the quoted, or nominal rate of interest
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on a given security
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r* - CORRECT ANSWERS ✔✔the real risk-free rate of interest (r* is
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pronounced r star and the rate that would where no inflation was
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expected
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rRF - CORRECT ANSWERS ✔✔the real risk-free rate of interest
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and the rate that would exist on a riskless security in a world
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where no inflation was expected |\ |\ |\ |\




IP - CORRECT ANSWERS ✔✔Inflation premium, IP is equal to the
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average expected rate inflation over the life of the security. The
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expected future inflation rate is not necessarily equal to the |\ |\ |\ |\ |\ |\ |\ |\ |\ |\


current inflation. |\




DRP - CORRECT ANSWERS ✔✔Default Risk Premium. This
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premium reflects the possibility that the issuer will not pay the
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promised interest or principal at the stated time. DRP is zero for
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US Treasury Securities, but it rises as the riskiness of the issuer
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increases.


LP (liquidity premium) - CORRECT ANSWERS ✔✔This is a
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premium charged by lenders to reflect the fact that some |\ |\ |\ |\ |\ |\ |\ |\ |\ |\


securities cannot be converted to cash on short notice at a |\ |\ |\ |\ |\ |\ |\ |\ |\ |\ |\


reasonable, LP is very low for treasury securities and for |\ |\ |\ |\ |\ |\ |\ |\ |\ |\