Vocabulary
This term describes the value of money or cash flows that have NOT been adjusted for the effects of inflation. It is the "sticker price" you see today
What is Nominal Value
This is the name of the economist who formalized the theory linking nominal and real interest rates with inflation.
Who is Irving Fisher?
This economic condition is the essential trigger for the phenomenon of early real amortization.
What is high inflation?
This is the most common and critical error in project evaluation, where an analyst discounts real cash flows with a nominal discount rate or vice-versa.
What is an Inconsistency Error (or Consistency Mismatch)?
This is the smallest country in the world by both area and population, and it is the spiritual and administrative center of the Roman Catholic Church.
What is Vatican City?
This economic theory, named after an economist, defines the relationship between nominal interest rates, real interest rates, and expected inflation.
What is the Fisher Effect?
This is the component of the nominal interest rate that compensates lenders for the expected loss of purchasing power.
What is the Inflation Premium?
Early real amortization describes the rapid decrease in this type of "value" of a loan's outstanding balance, as opposed to its face value.
What is Real Value or Purchasing Power?
This rate represents the project's "hurdle," the minimum return it must earn to be acceptable, and it must be carefully adjusted for inflation.
What is the Discount Rate (or Hurdle Rate / Cost of Capital)?
He was the legendary Egyptian queen whose reign and relationships with Julius Caesar and Mark Antony have been dramatized for centuries.
Who is Cleopatra?
This is the name for the consistent project evaluation method that involves discounting real cash flows at a real discount rate.
What is Real Method?
This is the approximate formula for the Fisher Effect, where the nominal rate is roughly equal to the sum of two other components.
what is i=r+pi?
This party in a loan contract benefits from early real amortization, while this other party is harmed by it.
Who are the Borrower (benefits) and the Lender (is harmed)?
This analysis involves changing key assumptions like sales growth or the discount rate to see how sensitive the NPV is to those changes, which is crucial in uncertain, inflationary environments.
What is Sensitivity Analysis (or Scenario Analysis)?
In the periodic table, this element is represented by the symbol 'Ag'. Its also a country named by this element.
What is Silver?
This phenomenon occurs when high inflation erodes the real value of a loan's principal faster than the scheduled repayment plan, creating a windfall for the borrower.
What is Early Real Amortization?
If a bank needs a 4% real return and expects 7% inflation, this is the nominal rate it must charge, using the exact Fisher formula.
What is 11.28%? (Calculation: (1.04 * 1.07) - 1 = 1.1128 - 1 = 0.1128 or 11.28%)
For early real amortization to create a windfall, the actual inflation must be greater than this specific rate that was originally anticipated and baked into the loan.
What is the Expected Inflation Rate (that was used to set the nominal interest rate)?
This are the most important output variables of a project evaluation, single key features (numbers) that summarizes the project's value in today's dollar
What are NPV, IRR, ROI?
This 19th-century author, known for novels like Pride and Prejudice and Sense and Sensibility, often published her works anonymously, simply as "By a Lady."
Who is Jane Austen?
This is a common valuation error where an analyst incorrectly mixes cash flows and discount rates from different frameworks, such as discounting real cash flows with a nominal WACC.
What is Consistency Mismatch (or Inconsistent Discounting)?
This is the real interest rate you discover when a one-year corporate bond has a yield of 14% and the actual inflation rate over the year turned out to be 10%.
What is approximately 3.64%? (Calculation: r = (1.14 / 1.10) - 1 = 1.03636 - 1 = 0.03636 or 3.64%)
In project evaluation, failing to account for early real amortization leads to a fundamental miscalculation of this key metric, which represents the true, after-inflation cost of debt.
What is the Real Cost of Debt?
This key factor is not a financial number, but a forecast of how long the project can generate a competitive advantage or superior cash flows.
What is the Project's Economic Life (or Competitive Advantage Period)?
This principle in physics, named after a German astronomer, states that a line joining a planet and the Sun sweeps out equal areas during equal intervals of time.
What is Kepler's Second Law of Planetary Motion (or the Law of Equal Areas)?