Understanding Interest Rates and Risks

<p>A company fails to pay its bondholders the interest due on its debt. (C)</p> Signup and view all the answers

<p>The number of potential buyers and sellers of the investment. (D)</p> Signup and view all the answers

<p>The bond's value will decrease. (B)</p> Signup and view all the answers

<p>The company's net income in the previous year. (A)</p> Signup and view all the answers

<p>Opportunity cost is the return you lose by choosing to invest in a particular security. (C)</p> Signup and view all the answers

<p>Liquidity Risk (B)</p> Signup and view all the answers

<p>Default Risk Premium (C)</p> Signup and view all the answers

<p>Maturity Risk (D)</p> Signup and view all the answers

<p>Holding Period Return (D)</p> Signup and view all the answers

<p>Inflation Premium (B)</p> Signup and view all the answers

<p>Real Risk-Free Rate (A)</p> Signup and view all the answers

<p>The geometric mean accounts for the compounding effect of returns. (B)</p> Signup and view all the answers

<p>Harmonic Mean (B)</p> Signup and view all the answers

<p>To compare investment returns over different periods. (A)</p> Signup and view all the answers

<p>Exchange Rate Fluctuations (C)</p> Signup and view all the answers

<p>lower (A)</p> Signup and view all the answers

<p>The arithmetic mean ignores compounding. (A)</p> Signup and view all the answers

<p>Guarantees consistent positive returns. (C)</p> Signup and view all the answers

<p>The stock price would likely decrease. (A)</p> Signup and view all the answers

<p>Default risk (C)</p> Signup and view all the answers

<p>The geometric mean return accurately reflects the compounding effect of returns, while the arithmetic mean does not. (A), The geometric mean return is a more conservative measure than the arithmetic mean return for investments that have experienced significant losses. (C)</p> Signup and view all the answers

<p>It ignores cash flows, providing a pure measure of the manager's investment decisions. (D)</p> Signup and view all the answers

<p>It considers the timing of cash flows, reflecting the investor's personal experience with the investment. (B)</p> Signup and view all the answers

<p>The Time-Weighted Return (TWR) will be higher than the Money-Weighted Return (MWR). (A)</p> Signup and view all the answers

<p>When assessing the performance of a portfolio manager who controls cash flows. (C)</p> Signup and view all the answers

<p>It converts returns to an annual basis, allowing comparisons of investments with different holding periods. (A)</p> Signup and view all the answers

<p>To provide a standard basis for evaluating the performance of different investments. (B)</p> Signup and view all the answers

<p>It's the process of reinvesting interest earned to generate further interest. (C)</p> Signup and view all the answers

<p>Calculating the future value of an investment based on compounding interest. (D)</p> Signup and view all the answers

<p>FV is the value of an investment at the end of a period, while PV is the value at the beginning of a period. (D)</p> Signup and view all the answers

<p>Higher compounding frequency results in a higher FV. (B)</p> Signup and view all the answers

<p>It represents the maximum possible growth of an investment. (D)</p> Signup and view all the answers

<p>Price relative is an alternative way to express HPR. (D)</p> Signup and view all the answers

<p>Compounding Frequency (A)</p> Signup and view all the answers

<p>It converts all returns to an annual basis, allowing for a common comparison. (D)</p> Signup and view all the answers

<p>An investor comparing a 3-month investment with a 1-year investment. (B)</p> Signup and view all the answers

<p>Annualized returns are used for comparing investments with different holding periods, while non-annualized returns are used for evaluating performance for a specific period. (B)</p> Signup and view all the answers

<p>It shows the true growth of your investment after adjusting for inflation. (B)</p> Signup and view all the answers

<p>Leverage is the use of borrowed money to increase the potential return on an investment. (A)</p> Signup and view all the answers

<p>Leverage increases risk because it magnifies both potential gains and losses. (B)</p> Signup and view all the answers

<p>3% (B)</p> Signup and view all the answers

<p>Returns are calculated and added to the principal continuously, even within a single period. (D)</p> Signup and view all the answers

<p>The arithmetic mean does not take into account the number of shares purchased at each price. (D)</p> Signup and view all the answers

The cost of borrowing or the return on savings/investments.

Minimum return expected by investors from an investment.

Rates used to calculate present value of future cash flows.

The return lost by spending money now instead of saving.

Return on an investment with no risk and no inflation.

Actual rate on very safe investments, including inflation.

Risk that a borrower won't repay borrowed money.

Risk of not being able to quickly sell an investment.

The risk associated with longer-term investments due to price volatility over time.

Extra return demanded by investors for taking on risk.

Extra return expected to maintain purchasing power due to inflation.

Compensation for the risk that a borrower may default.

Compensation for the risk of not being able to quickly sell an investment.

Compensation for the risks associated with longer-term investments.

A measure of how much money you made or lost on an investment over a period.

The simple average of a series of periodic returns.

A compound rate of return that reflects true growth over time.

The compound average return per year over several years.

An average cost of shares purchased over time, useful for DCA.

An investment strategy of buying a fixed amount at regular intervals, regardless of price.

Returns that are additive over multiple periods; total return equals the sum of sub-period returns.

Return adjusted for inflation, indicating true purchasing power increase.

The stated interest rate on investment, not adjusted for inflation.

Using borrowed money to potentially increase investment returns.

Return on investment when using borrowed funds, amplifying both gains and losses.

An average that sums values and divides by count, overstating average cost.

Investing the same amount regularly, buying more shares when prices are low.

Extreme values in data that can skew the average significantly.

An average calculated after removing a percentage of the highest and lowest values to reduce outlier impact.

An average created by replacing outliers with the nearest non-outliers rather than removing them.

The return on investment based on the timing of cash inflows and outflows.

The return on investment that ignores cash flow timing, focusing only on investment performance.

The percentage return used in calculating money-weighted returns considering cash flows.

MWR is personal and affected by cash flows; TWR measures overall investment performance, unaffected by cash flows.

To find the harmonic mean, sum the reciprocals of growth factors and divide by the count.

Applied to lessen distortion from outliers and provide a clearer average view of returns.

Profits or losses on an investment over a period, essential for performance tracking.

Time-weighted returns are essential for comparing the performance of different investments or managers.

Critical for understanding the growth or decline in value of investments, guiding future decisions.

The amount of money an investment will grow to in the future, based on a specific interest rate and time.

The current worth of a future amount of money at a given interest rate.

Earning interest on previously earned interest, leading to faster growth of the investment.

The number of times interest is calculated and added to an investment within a year.

The theoretical limit of compounding where interest is compounded every instant.

Ratio of the ending value to the beginning value of an investment, representing performance.

TWR ignores cash flows; MWR considers when cash is added/withdrawn, affecting returns.

(1+HPR)^(365/Days Held) - 1 to convert returns to annual basis.

More frequent compounding increases effective interest rate, raising future value.

TWR provides a pure measure of investment performance, ignoring cash flow influences.

MWR gives insight into an investor's actual return considering cash flow timing.