CFA Chartered Financial Analyst Level 1 - Quantitative Methods

Default Risk Correct Answer Risk that a borrower will not make promised payments Liquidity Risk Correct Answer Risk of recieving less than fair value for an investment if it must be sold for cash quickly Required Interest Rate on A Security Correct Answer = Nominal Interest Rate + Default Risk Premium + Liquidity Premium + Maturity Risk Premium Real Risk Free Rate / Nominal Risk Free Rate Correct 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 Correct Answer Required Rate of Return for an investor to willingly invest Discount Rate Correct Answer Used interchangeably with interest rates, especially in use of discounting cash flows Opportunity Cost Correct Answer The gain that is missed by not investing in a particular investment Effective Annual Rate Correct Answer The actualy rate of interst that is actually being earned after compounding more than annually Continuous Compounding Correct Answer 1. Multiply rate by time 2. Multiple answer by e (Second LN) 3. Multiply by PV Present Value of Perpetuity Correct Answer Financial instrument that pays a fixed amount of money at set intervals over an infinite period of time Present Value of a Projected Perpetuity Correct Answer 1. Calculate PV of Perpetuity 2. Find present value of (N -1) PV of Uneven Cash Flows Correct Answer 1. Clear Memory 2. Enter 0 in CF0 3. Enter Cash Flows in Sequence