Chapter 6 P250 - end 11

Chapter 6 P250 - end 11 - 6.1 interest rates and required...

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6.1 interest rates and required returns Interest rate---the compensation paid by the borrower of funds to the lender; from the borrower’s point of view, the cost of borrowing funds. Required return—the cost of funds obtained by selling an ownership interest; it reflects the funds supplier’s level of expected return. Liquidity preferences—general preferences of investors for shorter-term securities. Real rate of interest—the rate that creates an equilibrium between the supply of savings and the demand for investment funds in a perfect world, without inflation, where funds suppliers and demanders are indifferent to the term of loans or investments because they have no liquidity preference, and where all out comes are certain. Risk-free rate of interest, Rf--- the required return on a risk free asset, typically a 3-month U.S.Treasury bill. (T-bill) Term structure of interest rates—the relationship between the interest rate or rate of return and the time to maturity. Yield to maturity—compound annual rate of return earned on a debt security purchased on a given day and held to maturity.
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