Level 119 Level 121
Level 120

Interest Yields, Interest Rate Risk, & Derivative


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Principal
the amount of money borrowed in a loan of the amount of your money in savings account that is earning interest
Capital Gain
an increase in the value of an asset
discounted present value
The value today of a payment
Perpetuity
an annuity with infinite life
interest rate risk
the risk that a change in interest rates may affect the net worth of a financial intermediary because of a mismatch in the maturity of its assets and liabilities.
zero-coupon bonds
Bonds that pay lump-sum
Capital loss
is the sale of an investment less its purchase price.
The relationship among yields
term structure of interest rates
Yield Curve
relate the maturity of a treasury issue to the yield to maturity of the treasury issue
Segmented Markets Theory
The shape of the yield curve is the result of the interactions of supply and demand for funds in different market (i.e. maturity) segments.
expectations theory
A theory of the term structure
Preferred Habitat Theory
Similar to the segmented markets theory, but recognizes that market participants will deviate from their preferred maturity habitat if compensated adequately.
term premium
An amount by which the yield
rates
The relationship among yields
Default Risk
Risk that counterparty doesn't honour obligation (payment obligation, supplier doesn't deliver promised goods, contractor doesn't render promised service, etc.). Context is wide. No tx free of default risk
peso problem
An upward bias in depreciation
Real Interest Rate
The growth rate of purchasing power derived from an investment is the:
Fisher equation
A condition that defines
Real interest parity
A condition that postulates
reinvestment risk
lower coupon rate increases duration but decreases reinvestment risk. Instances of reinvestment risk:
portfolio diversification
Holding financial instruments
derivative security
A financial instrument in
contract
Contracts committing the issuer
long position
one who is buying is said to be in _______
short position
one who is selling is said to be in _______
Futures Contract
an arrangement for delivery of an item at some date in the future, where the delivery details are determined when the contract is created
interest rate futures
Contracts to buy or sell a standardized
stock-index futures
Promises of future delivery of a
currency future
An agreement to deliver to another
Option
gives holder the right to buy (sell) an asset at a predetermined price within a certain amount of time
exercise price
The price at which the holder
Call Option
buying shares
Put Option
selling shares
American Option
the right can be excerised anytime prior to the expiration of the option
European Option
can be excerised only at expiration
futures options
Options to buy or sell futures
stock options
Options to buy or sell firm
Currency Option
Right, or option, to exchange a specific amount of a currency on a specific date at a specific rate.
netting
The process of combining separate
Swap
an agreement to exchange cash flows or assets at some specified time in the future
interest rate swap
an agreement between counter parties in which each party agrees to make a series of payments to the other on agreed future dates until maturity of the agreement
Currency Swap
Simultaneous purchase and sale of foreign exchange for two different dates.
derivative credit risks
Risks stemming from the
derivative market risks
Risks arising from unanticipated
risks
Risks owing to a lack of adequate