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Ch4: Interest Rates, Exchange Rates, Security Prices
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Terms in this set (32)
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
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