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Default Risk - Risk that a borrower will not make promised payments Liquidity Risk - Risk of recieving less than fair value for an investment if it must be sold for cash quickly Required Interest Rate on A Security - = Nominal Interest Rate
- Default Risk Premium
- Liquidity Premium
- Maturity Risk Premium Real Risk Free Rate / Nominal Risk Free Rate - - 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 - Required Rate of Return for an investor to willingly invest Discount Rate - Used interchangeably with interest rates, especially in use of discounting cash flows
Opportunity Cost - The gain that is missed by not investing in a particular investment Effective Annual Rate - The actualy rate of interst that is actually being earned after compounding more than annually Continuous Compounding - 1. Multiply rate by time
- Multiple answer by e (Second LN)
- Multiply by PV Present Value of Perpetuity - Financial instrument that pays a fixed amount of money at set intervals over an infinite period of time Present Value of a Projected Perpetuity - 1. Calculate PV of Perpetuity
- Find present value of (N -1) PV of Uneven Cash Flows - 1. Clear Memory
- Enter 0 in CF
- Enter Cash Flows in Sequence
Cash Flow Additivity Principle - Present value of any stream of cash flow equals the sum of the present values of the cash flows. Ex: Cash flows of $100 for 4 Years & a $300 payment that occurs in year 3. Calculate the PV of both and add them together. (Use the Unequal Cash flow method.) NPV - Present Value of expected cash inflows minus the present value of the expected outflows, discounted at the appropriate rate. Use the Calculator (Cash Flow): Set CF0 = 0 (for profit) Set CF0 = Initial negative outflow (for total NPV) IRR - Discount rate that makes NPV equal to zero Use Calculator (Cash Flows): 1.CF0 = Initial Cash Outlay 2.CF1.....CFn 3.Compute IRR
Capital Budgeting - The allocation of funds to relatively long range projects or investments Capital Structure - The choice of long-term financial for the investments the company wants to make Working Capital Management - The management of the company's short-term assets (such as inventory) and short term liabilities (such as money owed to suppliers). NPV Decision Rule - If the investments NPV is positive - Accept Project If the investments NPV is negative - Decline Project If the investor has 2 (Mutually Exclusive) projects - Accept the Higher NPV IRR Decision Rule - IRR is greater than the required rate of return - Accept IRR is less that the required rate of return - Reject (Required rate also called hurdle rate) IRR vs. NPV (Mutually Exclusive) - Always accept the project with the greatest NPV when the IRR and NPV rules are conflicting.
Statistics (Defined) - Statistics - Refering to Data and methods that we use to analze data. Descriptive Statistics - The study of how data can be summarized effictively to describe important aspects of large data sets. Inference Statistics - Involves making forcasts, estimates, or judgements about a larger group from a smaller group actually observed. Measurement Scales - Nominal Scale - Contains the least information. Counted with no particular order. Ex: Municipal Bond Fund 1, Corporate Bond Fund 1, etc Ordinal Scale - Observation is assigned to one of several categories, then ordered with respect to a characteristic. Ex: Assigning 1 to first 100, 2 to second 100, etc Interval Scale - Provide relative ranking and differences between scale values are equal, but 0 doesn;t required absence. Ex: Temperature Ratio Scales - Ranking and qual differences between scale values. Also have true 0. Ex: Money.
Population and Samples - Population - All members of a specfic group Parameter - Descriptive measure of the population Sample - A subset of the population Samples statistic - A quantity computer from or used to describe a sample Frequency Distribution - Tabular display of data summarizing statistical data by assigning it to an interval. Relative Frequency - Percentage of frequencies within each interval Absolute Frequency - Actual number of frequencies within each interval Cumulative Relative/Absolute Frequencies - Cumulative sum of frequncies Histogram - Graphical representation of an absolute frequency
- Answer will be in (%)^2 format. Sample Variance/Sample Standard Deviation - Chebyshev's Inequality - For any set of observations, the percentage of the observations that lie within "k" standard deviation of the mean is atleast (formula) for all k > 1 Semivariance/Semideviation - Focuses on downside risk. For Variance:
- Calculate sample mean
- Use only observations equal or below the mean
- Use variance formula to calculate
- If Semivariance is less than SD, then the SD overstates risk.
- Square Root for Deviation Target Semivariance/Target Standard Deviation - 1. Identify Target
- Use numbers below target
- Use Variance Formula, but use total number of observations for N (instead of just the numbers used in formula)
- Square Root for Deviation Chebyshev's Inequality (2) - The following relationships hold for any distribution Coefficient of Variation/Relative Dispersion - Relative Dispersion - the amount of variability in a distribution relative to a reference point or benchmark CV - Common measurement for relative dispersion Sharpe Ratio - - Higher the number, the better
- The extra reward that you recieve for the added risk is called the "Mean excess return" Skewness (Effects on Mean, Median, Mode) -
