Liquidity Risk
ANSWER
Risk of recieving less than fair value for an investment if it must be sold for cash quickly
Default Risk
ANSWER
Risk that a borrower will not make promised payments
Required Interest Rate on A Security
ANSWER
= Nominal Interest Rate
+ Default Risk Premium
+ Liquidity Premium
+ Maturity Risk Premium
Real Risk Free Rate / Nominal Risk Free Rate
ANSWER
- Single period interest rate for a completely risk-free security with no inflation added
- Nominal = Real Risk Free Rate + Expected Inflation Rate
Required Rate of Return
ANSWER
1
, Required Rate of Return for an investor to willingly invest
Discount Rate
ANSWER
Used interchangeably with interest rates, especially in use of discounting cash flows
Opportunity Cost
ANSWER
The gain that is missed by not investing in a particular investment
Effective Annual Rate
ANSWER
The actualy rate of interst that is actually being earned after compounding more than annu-
ally
Continuous Compounding
ANSWER
1. Multiply rate by time
2. Multiple answer by e (Second LN)
3. Multiply by PV
Present Value of Perpetuity
ANSWER
Financial instrument that pays a fixed amount of money at set intervals over an infinite pe-
riod of time
Present Value of a Projected Perpetuity
ANSWER
2
ANSWER
Risk of recieving less than fair value for an investment if it must be sold for cash quickly
Default Risk
ANSWER
Risk that a borrower will not make promised payments
Required Interest Rate on A Security
ANSWER
= Nominal Interest Rate
+ Default Risk Premium
+ Liquidity Premium
+ Maturity Risk Premium
Real Risk Free Rate / Nominal Risk Free Rate
ANSWER
- Single period interest rate for a completely risk-free security with no inflation added
- Nominal = Real Risk Free Rate + Expected Inflation Rate
Required Rate of Return
ANSWER
1
, Required Rate of Return for an investor to willingly invest
Discount Rate
ANSWER
Used interchangeably with interest rates, especially in use of discounting cash flows
Opportunity Cost
ANSWER
The gain that is missed by not investing in a particular investment
Effective Annual Rate
ANSWER
The actualy rate of interst that is actually being earned after compounding more than annu-
ally
Continuous Compounding
ANSWER
1. Multiply rate by time
2. Multiple answer by e (Second LN)
3. Multiply by PV
Present Value of Perpetuity
ANSWER
Financial instrument that pays a fixed amount of money at set intervals over an infinite pe-
riod of time
Present Value of a Projected Perpetuity
ANSWER
2
