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Test 2
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Gravity
Definitions from chapters 5-8
Terms in this set (66)
time value of money
the difference in value between a dollar in hand today and a dollar promised in the future; a dollar today is worth more than a dollar in the future
time zero
the beginning of a transaction; often the current point in time
future value (FV)
the value of an investment after it earns interest for one or more periods
principal
the amount of money on which interest is paid
simple interest
interest earned on the original principal amount only
interest on interest
interest earned on interest that was earned in previous periods
compounding
the process by which interest earned on an investment is reinvested, so in future periods interest is earned on the interest as well as the principal
compound interest
interest earned both on the original principal amount and on interest previously earned
discounting
the process by which the present value of future cash flows is obtained
discount rate
the interest rate used in the discounting process to find the present value of future cash flows
present value (PV)
the current value of future cash flows discounted at the appropriate discount rate
annuity
a series of equally spaced and level cash flows extending over a finite number of periods
perpetuity
a series of level cash flows that continue forever
ordinary annuity
an annuity in which payments are made at the ends of the periods
present value of an annuity (PVA)
the present value of the cash flows from an annuity, discounted at the appropriate discount rate
amortizing loan
a loan for which each payment contains repayment of some principal and a payment of interest that is based on the remaining principal to be repaid
amortization schedule
a table that shows the loan balance at the beginning and end of each period, the payment made during that period, and how much of that payment represents interest and how much represents repayment of principal
future value of an annuity (FVA)
the value of an annuity at some point in the future
annuity due
an annuity in which payments are made at the beginning of each period
growing annuity
an annuity in which the cash flows increase at a constant rate
growing perpetuity
a cash flow stream that grows at a constant rate forever
annual percentage rate (APR)
the simple interest rate charged per period multiplied by the number of periods per year
effective annual interest rate (EAR)
the annual interest rate that reflects compounding within a year
quoted interest rate
a simple annual interest rate, such as the APR
Truth-in-Lending Act
a federal law requiring lenders to fully inform borrowers of important information related to loans, including the annual percentage rate charged
Truth-in-Savings Act
a federal law requiring institutions offering consumer savings vehicles, such as a certificates of deposits CDs), to fully inform consumers of important information about the saving vehicles, including the annual percentage rate paid
total holding period return
the total return on an asset over a specific period of time or holding period
expected return
an average of the possible returns from an investment, where each return is weighted by the probability that it will occur
variance
a measure of the uncertainty associated with an outcome
standard deviation
the square root of the variance
normal distribution
a symmetric frequency distribution that is completely described by its mean and standard deviation; also known as a bell curve due to its shape
portfolio
the collection of assets an investor owns
diversification
reducing risk by investing in two or more assets whose values do not always move in the same direction at the same time
coefficient of variation (CV)
a measure of the risk associated with an investment for each 1 percent of expected return
Sharpe ratio
A measure of the return per unit of risk for an investment
covariance of returns
a measure of how the returns on two assets covary, or move together
unsystematic or diversifiable risk
risk that can be eliminated through diversification
systematic or nondiversifiable risk
risk that cannot be eliminated through diversification
market portfolio
the portfolio of all assets
market risk
a term commonly used to refer to nondiversifiable, or systematic, risk
beta
a measure of nondiversifiable, systematic, or market, risk
Capital Asset Pricing Model (CAPM)
a model that describes the relation between risk and expected return
Security Market Line (SML)
a plot of the relation between expected return and systematic risk
fixed-income securities
debt instruments that pay interest in amounts that are fixed for the life of the contract
coupon payments
the interest payments made to bondholders
face value (par value)
the amount on which interest is calculated and that is owed to the bondholder when a bond reaches maturity
coupon rate
the annual coupon payment of a bond divided by the bond's face value
opportunity cost
the return from the best alternative investment with similar risk that an investor gives up when he or she makes a certain investment
par-value bonds
bonds that sell at par value, or face value; whenever a bond's coupon rate is equal to the market rate of interest on similar bonds, the bond will sell at par (face) value
discount bonds
bonds that sell at prices below par (face) value
premium bonds
bonds that sell at prices above par (face) value
yield to maturity
for a bond, the discount rate that makes the present value of the coupon and principal payments equal to the price of the bond
effective annual yield (EAY)
the annual yield that takes compounding into account; another name for the effective annual interest rate (EAR)
realized yield
for a bond, the interest rate at which the present value of the actual cash flows from a bond equals the bond's price
interest rate risk
uncertainty about future bond values that is caused by the unpredictability of interest rates
investment-grade bonds
bonds with low risk of default that are rated Baa (BBB) or above
noninvestment-grade bonds
bonds rated below Baa (or BBB) by rating agencies; often called speculative-grade bonds, high-yield bonds, or junk bonds
term structure of interest rates
the relation between yield to maturity and term to maturity
yield curve
a graph representing the term structure of interest rates, with the term to maturity on the horizontal axis and the yield on the vertical axis
bid price
the price a securities dealer will pay for a given stock
offer (ask) price
the price at which a securities dealer seeks to sell a given stock
post
a specific location on the floor of a stock exchange at which auctions for a particular security take place
specialist
the trader designated by an exchange to represent orders placed by public customers at auctions of securities; specialists handle a small set of securities and are also allowed to act as dealers
dividend yield
a stock's annual dividend divided by its current price
common stock
an equity share that represents the basic ownership clam in a corporation; the most common type of equiry security
preferred stock
an equity share in a corporation that entitles the owner to preferred treatment over owners of common stock with respect to dividend payments and claims against the firm's assets in the event of bankruptcy or liquidation, but that typically has no voting rights
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