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discounting
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the compound reduction from FV to PV
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compounding
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the earning of interest on interest
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compound interest
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interest earned in subsequent periods on the interest earned in previous periods
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lump-sum payment
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one time payment at a PV or FV
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TVM
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key value that a dollar today is worth more than a dollar tomorrow
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amortization schedule
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listing of periodic interest expense, reduction in principal each period, ending balance for each period
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amortized loan
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loan in which interest and principal is paid each period
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annuity
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series of equal cash flows at regular intervals across time
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annuity due
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series of equal & regular pmts at the beginning of a period
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console (perpetual bonds)
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stocks that pay interest forever, no maturity date, no promise to pay principal
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discount loan
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loan where interest & principal is repaid at maturity
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interest only loan
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loan where interest is paid regularly. principal & final interest is paid at date due.
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perpetuity
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infinite regular & equal pmts
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APR
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yearly uncompounded rate of interest
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EAR (effective annual rate)
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compound rate of interest per year
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compounding period
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period in which interest is applied
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fisher effect
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relationship which nominal interest rate is a function of the real rate, inflation, and product of inflation and real rate
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maturity premium
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the portion of the nominal interest rate that compensates the investor for additional waiting time to receive payment in full
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nominal interest rate
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interest rate composed of real interest rate plus the inflation rate
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periodic interest rate
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the number of compounding periods per year
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real interest rate
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the reward for waiting
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reward for waiting
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real rate of interest paid for forgoing use of money today.
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risk free rate
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theoretical interest rate with zero risk of any kind
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yield curve
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graph relating return rate and an asset's time to maturity
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basis point
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one hundredth of a percentage point
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bearer bond
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bond where ownership to the possessor
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Bone equivalent yield (BEY)
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annual % rate converted from bank discount rate on a treasury bill
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callable bond
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bond that issuer has the right to buy back prior to maturity at a predetermined price
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convertible bond
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right to swap bond for another asset, usually common stock, at a preset conversion ratio under certain conditions
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corpus
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bond with the coupons clipped off representing only principal
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coupon
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regular interest pmt of bond
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current yield
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annual bond coupon pmt divided by current price
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debentures
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unsecured bonds
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floating rate bond
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bond with changing coupon rate
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indenture
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formal contract of a bond detailing important information
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junor debt
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debt subsequent to the other (senior) debt with lower priority of pmt
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par value
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principal amount to be paid at the maturity date
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premium bond
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bond that current value is above par value
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prime rate
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interest rate banks charge their best customers
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protective covenant
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part of the bond that spells out both required and prohibited actions of the bond issuer
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putable bond
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bond holder has the right to sell the bond back to the issuer at a determined price prior to maturity
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sinking fund
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special fund for the retirement of debt on bonds
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STRIPS
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zero-coupon bonds made by separating the interest and principal on us. govt bonds
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treasury bill
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govt bond with a maturity less than one year
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treasury bond
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govt bond with maturity of more than ten years
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treasury note
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govt bond with a maturity between 2 and 10 years
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yield to call
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discount rate of return for a callable premium bond
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yield to maturity (YTM)
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return the holder receives if held on till maturity
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zero-coupon bond
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a bond that pays no coupons over its maturity
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compounding interest
FVn=PVo(1+r)^n (finding fv)
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PVo=FVo/ (1+r)^n (finding pv)
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n=ln(fv/pv)/ln(1+r) (finding time)
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R= (FVo * PVo) ^ (1/n) -1 (finding rate)
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FVn=
PMT [((1 + r)n - 1) / r]
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PVt =
PMT(t+1) [(1 - 1/(1 + r)n) / r]
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PVt =
PMT(t+1) / r
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Periodic Interest Rate
r = APR / m
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EAR =
(1 + APR/m)m - 1
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. r ≈
r* + h
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r =
r* + inf + dp + mp
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Bond Price (PB) =
Coupon PMT [(1 - 1/(1 + r)n) / r] + Par / (1 + r)n
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Current Yield =
Annual Coupon PMT / PB
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YTM =
(Par/PB)(1/n) – 1
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YTM ≈
(Coupon + (Par –PB)/n) / [.4 Par + .6 PB]
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Profit =
ending value + distributions-original cost
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HPR =
(profit or loss)/original cost
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Simple annual return =
HPR/n
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EAR =
(1 + HPR)(1/n) - 1
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Variance (X) =
[∑(Xi – Average)2] / (n – 1) = σ2 (Divisor of (n – 1) for sample and (n) for population)
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Standard Deviation =
(σ2)(1/2) = σ
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Re =
E (ri) = rf + βi [E(rm) - rf]
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