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Fin 3403 Exam 2 terms
Fin 3403 Exam 2 terms
37
Finance
Undergraduate 3
03/19/2012

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Term
production opportunity
Definition
The return available within an economy from investment in a productive asset
Term
time preference for consumption
Definition
The preference of a consumer for current consumption as opposed to saving for future consumption
Term
risk
Definition
The chance that a financial asset will not earn the return promised
Term
inflation
Definition
The tendency of prices to increase over time
Term
nominal (quoted) risk-free rate, r(rf)
Definition
The rate of interest on a security that is free of all risk; proxied by the T-bill rate or the T-bond rate and includes an inflation premium
Term
Real risk-free rate of interest r*
Definition
The rate of interest that would exist on default-free U.S treasury securities if no inflation were expected
Term
inflation premium (IP)
Definition
A premium for expected inflation that investors add to the real risk-free rate of return
Term
Default risk premium (DRP)
Definition
The difference between the interest rate on a U.S. Treasury bond an a corporate bond of equal maturity and marketability; compensation for the risk a corporation will not meet its debt obligations
Term
Liquidity premium (LP)
Definition
A premium added to the rate on a security if the security cannot be converted to cash on short notice at a price that close to the original cost
Term
maturity risk premium (MRP)
Definition
a premium that reflects interest rate risk; bonds with longer maturities have greater interest rate risk
Term
term structure of interest rates
Definition
The relationship between yields and maturities of securities
Term
yield curve
Definition
A graph showing the relationship between yields and maturities of securities on a particular date
Term
liquidity preference theory
Definition
The theory that, all else being equal, lenders prefer to make short-term loans; hence they will lend short-term funds at lower rates than they lend long-term funds
Term
expectations theory
Definition
The theory that the shape of the yield curve depends on investors' expectations about future inflation rates
Term
market segmentation theory
Definition
the theory that every borrower and every lender has a preferred maturity, and that the slope of the yield curve depends on the supply of and the demand for funds in the long-term market relative to the short-term market
Term
open market operations
Definition
Operations in which the federal reserve buys or sells treasury securities to expand or contract the U.S money supply
Term
debt
Definition
A loan to a firm, government, or individual
Term
discounted securities
Definition
securities selling for less than par value
Term
Treasury bills (T-bills)
Definition
discounted short-term debt issued by the U.S government
Term
repurchase agreement
Definition
An arrangement where one firm sells some of its financial assets to another firm with a promise to repurchase the securities at a later date
Term
federal funds
Definition
Overnight Loans from one bank to another
Term
Bankers acceptance
Definition
discounted instrument issued by a bank that obligates the bank to pay a specified amount at some future date
Term
commercial paper
Definition
A discounted instrument that a type of promissory note, or "legal IOU issued by large financially sound firms
Term
certificate of deposit (CD)
Definition
an interest-earning time deposit at a bank or other financial intermediary
Term
Eurodollar deposit
Definition
A deposit in a foreign bank that denominated in U.S dollars
Term
money market mutual funds
Definition
pools of fund managed by investment companies that are primarily invested in short-term financial assets
Term
term loan
Definition
A loan, generally obtained from a bank, on which the borrower agrees to make a series of payments consisting of interest and principal
Term
bond
Definition
a long-term debt instrument
Term
coupon rate
Definition
Interest paid on a bond or other debt instrument stated as a percentage of its face value
Term
government bonds
Definition
debts issued by a federal government
Term
municipal bonds
Definition
bonds issued by a state or local government
Term
corporate bonds
Definition
long-term debt instruments issued by corps.
Term
mortgage bond
Definition
A bond backed by tangible assets. First-mortgage bonds are senior in priority to second mortgage bonds
Term
debenture
Definition
A long-term bond that is not secured by a mortgage on specific property
Term
Subordinated debenture
Definition
A bond which in the event of liquidation has a claim on assets only after the senior debt has been paid off
Term
income bond
Definition
A bond that pays interest to the holder only if the interest is earned by a firm
Term
putable bond
Definition
a bond that can be redeemed at the bondholders option when certain circumstances exist
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