Chapter 3 Interest Rates and Rates of Return

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Question Answer
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


Question Answer
When a saver places funds in a financial institution they are the saver's asset/liability and the institution's asset/liabilityasset
The financial institution channels funds to borrowers and pays the saver/lender a(n) --- as a reward for the use of his/her funds.interest rate
--- are IOUs or promises by the borrower to pay interest and repay principal to a saver/lender.debt instruments
Debt instruments are also called market instruments
--- is a debt instrument where the borrower receives from the lender an amount of funds called the principal and agrees to repay the lender the principal plus an additional amount called interest in a single payment.simple loan
--- is a debt instrument where the borrower pays the lender the same amount of the loan, called the face value or par value in a single payment at maturity, but receives less than the face value bond
--- is a debt instrument where the borrowers issuing a coupon bond make multiple payments of interest (called coupon payments) at regular intervals and repay the face value at bond
--- is a debt instrument where the borrower makes regular periodic payments of interest and part of the principal to the lender; at maturity there is no lump-sum payment of principalfixed-payment loan