The Time Value Of Money

Question 0

Face Value (par)

Answer 0

Amount the lender promises to pay back.

Question 1

Bank Discount Basis

Answer 1

r = (D/F) (360/t)
bd

D= discount in dollars
F= face value 
t= number of days til maturity

A quoting convention that annualizes, on a 360 day year, the discount as a percentage of face value.

Question 2

Growth Rate Formula

Answer 2

1/n

r = (FVn/PV) - 1

Question 3

Present Value of an Infinite Series of Cashflows (Perpetuity)

Answer 3

PV = A/r

Question 4

Present value of a single cash flow

Answer 4

-n

PV = FV (1+r)

Question 5

Future value of an ordinary annuity

Answer 5

N

FV = A((1+r) -1)/r)

Question 6

Continuous compounding EAR

Answer 6

rs

EAR = e -1

Question 7

Effective annual return (EAR)

Answer 7

m

EAR = (1+periodic interest rate) -1

Question 8

Future value of a continuously compounding single cash flow

Answer 8

rsN

FV = PVe

Question 9

Future value of a single cash flow

Answer 9

N

FV = PV (1+r)

Question 10

IRR rule

Answer 10

Accept all projects with an IRR exceeding the required rate of return.

Question 11

Present value of a series of cash flows (annuity)

Answer 11

-n

PV = A ((1-(1+r) )/r)

Question 12

Money Market Yield (CD equivalent yield)

Answer 12

r = 360 (rbd)/360-(t)(rbd)
mm

A yield on a basis comparable to the quoted yield on an interest bearing money market instrument that pays interest on a 360 day basis.

The annualized holding period yield.

Question 13

Time weighted return

Answer 13

Geometric mean of the HPRs

Question 14

Internal Rate of Return (IRR)

Answer 14

The rate of return that makes NPV = 0. Discount rate needed to make outflows equal to inflows.

Question 15

Net present value (NPV)

Answer 15

The difference between an investments cash inflows minus the present value of its inflows.

Question 16

NPV rule

Answer 16

An investment should be undertaken if it’s NPV is positive, and not undertaken if negative.

Question 17

Pure discount instruments

Answer 17

Instruments that pay interest as the difference between the amount borrowed and amount payed back. (US T-Bills)

Question 18

Holding period return (HPR)

Answer 18

HPR = (P1-P0+D)/P0

Question 19

Money Market

Answer 19

The market for short term debt instruments (one year maturity or less)

Question 20

Money weighted return

Answer 20

The IRR of a portfolio, taking into account all cash flows

Question 21

Effective annual yield

Answer 21

365/t
EAY = (1+HPY) -1

An annualized return that accounts for the effect of interest on interest

Question 22

Holding period yield

Answer 22

HPY = (P1-P0+D)/P0