LM 2: Time Value of Money in Finance Flashcards
What is the formula for FV and PV of a cash flow?
FV = PV * (1+R)^N
PV = FV * (1+R)^-N
What is the formula for the present value of a coupon-paying bond?
PV = (PMT1 /(1+R)^1) + (PMT2 /(1+R)^2)… (PMTn+FVn /(1+R)^n)
PMT = coupon payment
n = time period
r = interest rate
What is a perpetual bond (aka perpetuity)?
a special type of coupon instrument that makes fixed payments at regular intervals but never matures
What is the formula for the present value of a perpetuity?
PV = PMT/r
What is the formula for the present value of an annuity?
PV = A [(1-(1+r)^-N)/(r)]
What are 3 ways a stock’s expected dividend payments can be structured? RGG
- remain a constant amount
- grow at a constant rate
- grow at a changing rate
What is the formula for the present value of a stock?
PV = D/r
d = dividend
r= required return
What is the formula for the present value of a stock with a constant dividend growth rate?
PV = D0 (1+g)/ (r-g)
What is the yield-to-maturity formula for a zero coupon bond?
r = ((FV/PV) ^1/N) -1
N = periods
What is the formula for the required rate of return for an equity investment?
r = D1/PV + G
D1/PV = dividend yield
g = dividend growth rate
What is the formula for the forward price-to-earnings ratio derived from the present value of an equity investment?
PV/E1 = (D1/E1)/ (r-g)
E1 = earnings per share
D1/E1 = dividend payout ratio
r = required rate of return
g = growth rate
What is the forward rate formula that wouldn’t allow arbitrage opportunities for 2 investments in risk-free government bonds with different rates and years until maturity?
Forward rate = ((1+r2)^2)/(1+r1)) -1
