Money Market Valuation

Question 1

Holding Period Return

Answer 1

the return you generate from the investment

Question 2

Holding Period Return Equation (HPR)

Answer 2

HPR= (income + Vn-Vo) / Vo
income= the distributions or cash flows from the investment (e.g. dividends)
Vn= ending value of investment
Vo= beginning value of investment

Question 3

Effective Annual Yield equation (EAY)

Answer 3

(1 + HPR) ^ (365/days) - 1 (x100 for percent)

days= holding period of your investment (if your holding period is given in months, you can use (12/months instead)

Question 4

Net Present Value (NPV) Equation

Answer 4

Present value= (Future Value)/ (1+r)^t

r= required return
t= how long in the future is the cash flow
(month in fraction!)

Question 5

Valuation is the method of

Answer 5

determining the value of an investment, given the timing of cash flows it offers and the required rate of return on said investment

Question 6

Money Market Investment Positives

Answer 6

-very low risk
-liquid: you can typically sell your shares in a money market fund without loss

Question 7

Money Market Investment Negatives

Answer 7

-low yield: typically 2-3% per annum

Question 8

Scenarios where money market is appropriate:

Answer 8

-in a retirement account for older individuals who cannot afford to take a loss
-when you are saving for a short-term goal (1 year or less)

Question 9

The majority of bonds pay a

Answer 9

fixed coupon every 6 months

Question 10

At the bond’s maturity,

Answer 10

said bond will pay the face value to the investor

Question 11

The value of the bond, is the sum of

Answer 11

the net present value (NPV) of each of the cash flows

Question 12

NPV is the

Answer 12

cash flow discounted to the present at the bonds required return

Question 13

A bond’s required return (aka) ___ is the ____-

Answer 13

aka discount rate is the risk free rate plus the risk premium for that bond