# Chapter 3 Interest Rates and Rates of Return

cnbunny's version from 2018-02-28 07:45

## Section

The --- on a loan should cover the opportunity cost of supplying credit.
The --- provides a link between the financial present and the financial future.
interest rate
What are the opportunity costs that the interest rate on a loan covers? (3)1) compensation for (expected) inflation
2) compensation for default risk
3) compensation for opportunity cost of waiting to spend the money until it is paid back
future value formula (w/ compounded interest)
--- is a common unit to measure the value of payments received at different points of time in the future.
--- converts all future payments to "today's dollars" using the idea that \$1 received 1 year from now is less valuable than \$1 received today.
present value (PV)
future value formula (w/ PV)
present value formula
Present value is sometimes referred to as ---.present discounted value
The further in the future a payment is to be received, the smaller/greater its present value.smaller
The higher the interest rate used to discount future payments, the smaller/greater the present value of the payments.smaller
The --- of a series of future payment is simply the sum of the discounted value of each individual payment.present value
present value formula (of a series of future payments)
--- gives us a way of determining the prices of financial assets.Discounting
The price of a financial asset is equal to the --- of the payments to be received from owning it.present value