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finance exam 2 Cheat Sheet by


the compound reduction from FV to PV
the earning of interest on interest
compound interest
interest earned in subsequent periods on the interest earned in previous periods
lump-sum payment
one time payment at a PV or FV
key value that a dollar today is worth more than a dollar tomorrow
amorti­zation schedule
listing of periodic interest expense, reduction in principal each period, ending balance for each period
amortized loan
loan in which interest and principal is paid each period
series of equal cash flows at regular intervals across time
annuity due
series of equal & regular pmts at the beginning of a period
console (perpetual bonds)
stocks that pay interest forever, no maturity date, no promise to pay principal
discount loan
loan where interest & principal is repaid at maturity
interest only loan
loan where interest is paid regularly. principal & final interest is paid at date due.
infinite regular & equal pmts
yearly uncomp­ounded rate of interest
EAR (effective annual rate)
compound rate of interest per year
compou­nding period
period in which interest is applied
fisher effect
relati­onship which nominal interest rate is a function of the real rate, inflation, and product of inflation and real rate
maturity premium
the portion of the nominal interest rate that compen­sates the investor for additional waiting time to receive payment in full
nominal interest rate
interest rate composed of real interest rate plus the inflation rate
periodic interest rate
the number of compou­nding periods per year
real interest rate
the reward for waiting
reward for waiting
real rate of interest paid for forgoing use of money today.
risk free rate
theore­tical interest rate with zero risk of any kind
yield curve
graph relating return rate and an asset's time to maturity
basis point
one hundredth of a percentage point
bearer bond
bond where ownership to the possessor
Bone equivalent yield (BEY)
annual % rate converted from bank discount rate on a treasury bill
callable bond
bond that issuer has the right to buy back prior to maturity at a predet­ermined price
conver­tible bond
right to swap bond for another asset, usually common stock, at a preset conversion ratio under certain conditions
bond with the coupons clipped off repres­enting only principal
regular interest pmt of bond
current yield
annual bond coupon pmt divided by current price
unsecured bonds
floating rate bond
bond with changing coupon rate
formal contract of a bond detailing important inform­ation
junor debt
debt subsequent to the other (senior) debt with lower priority of pmt
par value
principal amount to be paid at the maturity date
premium bond
bond that current value is above par value
prime rate
interest rate banks charge their best customers
protective covenant
part of the bond that spells out both required and prohibited actions of the bond issuer
putable bond
bond holder has the right to sell the bond back to the issuer at a determined price prior to maturity
sinking fund
special fund for the retirement of debt on bonds
zero-c­oupon bonds made by separating the interest and principal on us. govt bonds
treasury bill
govt bond with a maturity less than one year
treasury bond
govt bond with maturity of more than ten years
treasury note
govt bond with a maturity between 2 and 10 years
yield to call
discount rate of return for a callable premium bond
yield to maturity (YTM)
return the holder receives if held on till maturity
zero-c­oupon bond
a bond that pays no coupons over its maturity


compou­nding interest
FVn=PV­o(1­+r)^n (finding fv)
PVo=FVo/ (1+r)^n (finding pv)
n=ln(f­v/p­v)/­ln(1+r) (finding time)
R= (FVo * PVo) ^ (1/n) -1 (finding rate)
PMT [((1 + r)n - 1) / r]
PVt =
PMT(t+1) [(1 - 1/(1 + r)n) / r]
PVt =
PMT(t+1) / r
Periodic Interest Rate
r = APR / m
(1 + APR/m)m - 1
. r ≈
r* + h
r =
r* + inf + dp + mp
Bond Price (PB) =
Coupon PMT [(1 - 1/(1 + r)n) / r] + Par / (1 + r)n
Current Yield =
Annual Coupon PMT / PB
(Par/P­B)(1/n) – 1
(Coupon + (Par –PB)/n) / [.4 Par + .6 PB]
Profit =
ending value + distri­but­ion­s-o­riginal cost
(profit or loss)/­ori­ginal cost
Simple annual return =
(1 + HPR)(1/n) - 1
Variance (X) =
[∑(Xi – Average)2] / (n – 1) = σ2 (Divisor of (n – 1) for sample and (n) for popula­tion)
Standard Deviation =
(σ2)(1/2) = σ
Re =
E (ri) = rf + βi [E(rm) - rf]

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