Annuity/Perpetuity
What is an annuity?
A series of regular payments at regular intervals for a defined period of time.
What is a simple interest?
Interest earned on the original principle
What is Unique risk?
The risk that is unique to an individual company. Unique risk, varying from company to company, is the risk that can be diversified.
What is a perpetuity?
A series of regular payments for regular periods that go on indefinitely.
What is compound interest?
Interest earned is applied to the principal each period
What is a market risk?
The risk that affects all companies in the economy. Market risk, because it affects all market participants, cannot be diversified away and thus the risk that is relevant for determining the opportunity cost.
What are payments that occur at the beginning of each period?
Annuity due
How do you calculate the annual percentage rate (APR)?
Periodic interest rate * number of periods per year
What is Beta?
a measure of the market/systematic risk of an asset: how the asset return varies with the market return, and is thus a measure of the risk that cannot be diversified away.
What are perpetual payments where the amounts grow at a constant rate?
Growing perpetuity
What is the annual interest rate that reflects the impact of intra-year compounding?
Effective annual interest rate
What is Capital Asset Pricing Model (CAPM)
a model that uses market/systematic risk to calculate the opportunity cost/expected rate of return.
OR
E[Ri]=Rf+βi(E[Rm]−Rf)
Expected Return = Risk-free return * beta(Expected market return - risk free rate)
What is the formula for the present value of a perpetuity?
Cash Flow / discount rate
Where might you see a stated annual interest rate?
contacts, including loans such as credit cards, auto loans and mortgages.
What is the difference between a mutual fund and a hedge fund
Mutual funds are for the public and hedge funds are for accredited investors.