Define Four of the Nine Perceptual Distortions Listed in the Textbook

question 55

Essay

Define four of the nine perceptual distortions listed in the textbook and explain why it is important to have an understanding of perceptual distortions in general.

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Definitions:

Interest Rates

The cost incurred by a borrower, represented as a proportion of the principal, for accessing a lender's assets.

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.

Liquidity Premiums

Additional yield that investors demand for holding securities that are not easily sold at their fair market value without a significant price concession.

Callable Bonds

Bonds that can be redeemed by the issuer prior to their maturity date at a predetermined call price.