The required rate of return (RRR) ✔✔the minimum annual percentage earned by an investment that will induce individuals or companies to put money into a particular security or project Yield ✔✔dividend, interest or return the investor receives from a security like a stock or bond, usually reported as an annual figure Interest Rates ✔✔The cost of borrowing money. interest charged by a lender such as a bank on a loan Annual Percentage Rate (APR) ✔✔the annual rate charged for borrowing or earned through an investment, expressed as a percentage that represents the actual yearly cost of funds over the term of a loan Effective APR ✔✔The amount you pay after fees and compound interest have been added to the charges premium ✔✔the price above par value at which a security is sold market interest rate ✔✔rate at which interest is paid by a borrower for the use of money that they borrow from a lender in the market Liquidity ✔✔availability of cash over the short term; ability to service short-term debt Deferred consumption ✔✔When money is loaned, the lender delays spending the money on consumption goods time preference theory ✔✔people prefer goods now to goods later. In a free market there will be a positive interest rate Inflationary expectations: ✔✔Most economies generally exhibit inflation, meaning a given amount of money buys fewer goods in the future than it will now. The borrower needs to compensate the lender for this. If the inflationary expectation goes up, then so does the market interest rate and vice versa The expectation hypothesis of the term structure of interest rate ✔✔the proposition that the longterm rate is determined by the market's expectation for the short-term rate plus a constant risk premium The liquidity premium theory ✔✔asserts that long-term interest rates not only reflect investors' assumptions about future interest rates but also include a premium for holding long-term bonds segmented market hypothesis ✔✔financial instruments of different terms are not substitutable; therefore supply and demand in the markets for short-term and long-term instruments is determined largely independently Liquidity premium ✔✔a term used to explain a difference between two types of financial securities (e.g., stocks), that have all the same qualities except liquidity Term structure of interest rates ✔✔the relationship between the interest on a debt contract and the maturity of the contract. Yield Curve ✔✔a line that plots the interest rates, at a set point in time, of bonds having equal credit quality but differing maturity dates Cost-push inflation ✔✔When prices rise due to an increase in the cost of production