COMMERCE 2FA3 Study Guide - Midterm Guide: Interest Rate Risk, Discount Window, Time Preference

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Topic 2: time - rewarding patience (chapter 2 + chapter 1 (where do interest rates come in?) Societal rate of time preference is a major determinant of supply. People are impatient = high interest rate. People are patient = low interest rate. Business need of capital is a major determinant of demand. Certain cashflows discounted back at riskfree interest rate. Risky cashflows can be discounted back using expected values. invested for a year at continuously compounded rate yields: From future value to present value (of ): Constant stream of cashflows going on forever. Stream of cashflows growing at a constant rate going on forever. Constant stream of cashflows lasting for a period. Stream of cashflows growing at a constant rate lasting for n periods. Pv of annuity compounded forward to annuity"s end. Most bank loans (incl. mortgages) are amortized loans. Topic 3: risk - rewarding nerve (chapter 3 and chapter 4. 2-4. 3) Section 1: return vs risk and historical experience.

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