Page 4 - FINAL CFA I SLIDES JUNE 2019 DAY 2
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LOS 6.a: Interpret interest rates as Session Unit 2: 6 The Time Value of Money
required rates of return, discount
rates, or opportunity costs.
Interest rate = Rate of return required for a particular investment, or
Discount rate for calculating the PV (NPV) of future cash flows, or
Opportunity cost of consuming now, rather than saving and investing.
LOS 6.b: Explain an interest rate as the sum of a real risk-free rate and premiums that compensate investors for
bearing distinct types of risk.
Real risk-free rate = theoretical rate on a single-period loan when there is no expectation of inflation.
Nominal risk-free rate = real risk-free rate + expected inflation rate.
real risk-free rate +
expected inflation (risk premium) +
default risk premium +
liquidity risk premium +
maturity risk premium =
The required rate of return on a security
