32 terms

present value

the value today of an amount to be received at some date in the future

future value

value at a time in the future, including accumulated interest, of an amount invested earlier

compounding

calculation of interest on interest already earned

zero-coupon bond (zero)

security of long maturity promising a single payment

market price

price at which a security can be bought and sold

market yield

the interest rate at which the present value of payments promised by a security equals its market price

compounding period

period over which interest is calculated

periodic interest rate

rate per compounding period

annual percentage rate (APR)

interest rate accrued at the end of a year as a percentage of the principal amount

amortized loans

security that promises a series of equal payments

annuity

amortized loan with annual payments

perpetuity

annuity that continues forever

yield to maturity (YTM)

single (annual) interest rate at which the present value of a bond's coupon and principal payments equals its market price

approximate yield to maturity (AYTM)

approximation to the YTM calculated from a simple formula

selling at a discount

selling at a price below face value

selling at a premium

selling at a price above face value

selling at par

selling at a price equal to face value

bid price

price that dealers will pay for a security

asked price

price at which dealers will sell a security

interest rate risk

risk associated with changes in market interest rates

holding period yield

the annual rate actually earned on a security over the given period

reinvestment risk

risk associated with reinvestment at uncertain interest rates

duration

measure of the sensitivity of the value of security to the changes in market interest rates

exchange rate risk

risk associated with fluctuations in exchange rates

monetary expansion

a net increase in the quantity of money as a result of money creation

consumer price index (CPI)

index of prices faced by an average urban family

rate of inflation

rate of change of the level of prices

measuring in constant dollars

measuring amounts of money in terms of their equivalent purchasing power in some base period

nominal interest rate

relates the dollar amount of interest to the dollar amount of money lent, interest rate not corrected for inflation

real interest rate

interest measured in terms of purchasing power, interest rate corrected for inflation

Price Level Adjusted Mortgage (PLAM)

a mortgage with payments that are constant in terms of purchasing power (adjusted for inflation)

indexation

linking of an amount due to a price index

examples include price level adjusted mortgage (PLAM) and taxes accounting for inflation/ CPI

examples include price level adjusted mortgage (PLAM) and taxes accounting for inflation/ CPI