Corporate Finance - Chapter 3 Arbitrage and Financial Decision Making
What is Arbitrage opportunity?
Any situation in which it is possible to make a profit without taking any risk or making any investment.
What is the Net Present Value?
Difference between PV of its benefits and the PV of its cost NPV = PV (Benefits) - PV (Cost)
What is the risk-free rate also referred to as?
Discount rate
What is present value?
Value in terms of dollars today.
What is time value of money?
The idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received.
What is Risk-Free Interest Rate?
The theoretical rate of return of an investment with zero risk. The risk-free rate represents the interest an investor would expect from an absolutely risk-free investment over a specified period of time. In practice, however, the risk-free rate does not exist because even the safest investments carry a very small amount of risk. Thus, the interest rate on a three-month U.S. Treasury bill is often used as the risk-free rate.
What is a normal market like?
A competitive market in which there are no arbitrage opportunities because once they opportunities are spotted, they quickly disappear.
To compare cost and benefits, we first need to do what?
Covert to a common unit
What is Net Present Value (NPV)?
Present Value of its Benefits minus Present Value of its Costs
What is interest rate?
Rate at which we can exchange money today for money in the future. It is exchange rate across time.
What is future value?
Terms of dollars in the future
What is the Discount Factor?
1 / (1+r)
What is the interest rate factor?
1+ r
What is Arbitrage?
Practice of buying and selling equivalent goods in different markets to take advantage of a price difference is known as arbitrage.
