COB 300 FINANCE EXAM #2
QUESTIONS AND ANSWERS
risk premium - Answer-the difference between the expected rate of return on a given
risky asset and that on a less risky asset
nominal interest rate - Answer-the stated interest rate on a loan
real interest rate - Answer-the interest rate corrected for the effects of inflation
Fisher Effect - Answer-nominal rate increases to protect investors from inflation
Nominal Rate in Fisher Effect - Answer-R = (1 + real rate)(1 + expected inflation) - 1
Volatility - Answer-Indicates how much and how quickly the value of an investment,
market, or market sector changes.
Methods of Measuring Risk (Volatility) - Answer-variance
standard deviation
beta
Variance - Answer-statistical measure of how much a result varies from the mean of a
set of observations
Standard deviation - Answer-statistical measure of the variability of a set of
observations
beta - Answer-measures relationship between an asset's return to that of the market;
'measures market risk'
Expected Return formula - Answer-return, average return - risk-free rate
Types of Loan - Answer-pure discount loans
interest-only loan
amortized with fixed payment
pure discount loan - Answer-single lump sum at some time in the future at a set interest
rate
interest-only loan - Answer-interest only then lump sum at end
amortized with fixed payment - Answer-each period a fixed amount is paid
- some interest and some principle
- more interest in the beginning
QUESTIONS AND ANSWERS
risk premium - Answer-the difference between the expected rate of return on a given
risky asset and that on a less risky asset
nominal interest rate - Answer-the stated interest rate on a loan
real interest rate - Answer-the interest rate corrected for the effects of inflation
Fisher Effect - Answer-nominal rate increases to protect investors from inflation
Nominal Rate in Fisher Effect - Answer-R = (1 + real rate)(1 + expected inflation) - 1
Volatility - Answer-Indicates how much and how quickly the value of an investment,
market, or market sector changes.
Methods of Measuring Risk (Volatility) - Answer-variance
standard deviation
beta
Variance - Answer-statistical measure of how much a result varies from the mean of a
set of observations
Standard deviation - Answer-statistical measure of the variability of a set of
observations
beta - Answer-measures relationship between an asset's return to that of the market;
'measures market risk'
Expected Return formula - Answer-return, average return - risk-free rate
Types of Loan - Answer-pure discount loans
interest-only loan
amortized with fixed payment
pure discount loan - Answer-single lump sum at some time in the future at a set interest
rate
interest-only loan - Answer-interest only then lump sum at end
amortized with fixed payment - Answer-each period a fixed amount is paid
- some interest and some principle
- more interest in the beginning
