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Financial Economics > Formulae > Flashcards

Formulae Flashcards

1
Q

What is the equation for FV if simple r is used?

A

FV.1 = (1+r)P0

11,200 = (1+0.12)x 10,000

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2
Q

What is the FV equation when compounding r is used?

A

FVt = P0 (1+r),t

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3
Q

What is the PV equation?

A

PV0 = discount factor x P.t

remember discount factor equation is DFt = 1/ (1+r),t

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4
Q

What is the discount factor equation?

A

DF1 = 1/ (1+r),t

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5
Q

What is the equation for the PV of a perpetuity?

A

PV0 (perp) = C / r

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6
Q

What is the equation to find the PV of an annuity?

A

PV = C / r [ 1 - 1/(1+r),t ]

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7
Q

What is the equation of a perpetuity starting payment from year 1 + t?

A

(C/r) * 1/(1+r)t

This is because it is now adding a discount factor as it’s future cash

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8
Q

What is the expanded PV of an annuity equation when derived from perpetuities?

A

C/r - C/r* 1/(1+r),t

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9
Q

What is the EAR equation?

A

EAR = (1+APR/m),m - 1

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10
Q

In bonds, What is denoted by P?

A

Price of a bond before maturity

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11
Q

What is denoted by V?

A

The face/ par/ principle value of the bond paid by the issuer

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12
Q

What is denoted by c?

A

Coupon rate

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13
Q

In bonds, what is denoted by C?

A

Coupon

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14
Q

Annuity

How can we compute the value of a bond?

A

PV = annuity + 100/(1+r),t

PV = C / r [ 1 - 1/(1+r),t ] + 100/(1+r),t

- it is an annuity so we use its formula + the end bit

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15
Q

What equation do you use to compute bond returns?

A

rate of return = (coupon income + price change) / investment

aka

R = (C1 + P1-P0) / P0

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16
Q

How do you compute the interest yield (IR) of a bond?

A

IR%= C / P0

Coupon / the clean price

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17
Q

Under the zero growth model, what equation can you use to find P of a stock?

A

P = D / R

D = dividends R = nominal interest rate

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18
Q

D is not always constant. What equation can you use to find the P of a stock with D that grow at a constant rate?

A

P0 = D1/ R - g

obviously, higher g the higher the price of a constant growth stock

19
Q

What equation can be used to help value a differential growth stock?

A

P.H = (D .H+1) / r - g

H and 1 are little

20
Q

same as bond calculation

How can you calculate the expected return on a stock?

pays dividend D1 in t =1

A

r = (D1 + P1 - P0)/ P0

21
Q

What is Gordon’s Dividend Growth Model?

A

P0 = [D0 (1+g) ] / r - g

22
Q

What is the dividend payout ratio?

A

K = D/ eps

23
Q

what is the plowback / retention ratio?

A

b = 1 - D/eps

24
Q

What is the g equation using plowback ratio ?

A

g = plowback ratio x return on retained earnings
g = b * r.E

25
Q

What is the price-earning ratio?

A

PE0 = P0 / eps0
aka current share price divided by the latest annual earning per share

26
Q

What represents variance? (VAR)

A

σ squared

27
Q

What represents Standard Deviation (SD)?

A

σ aka square root of VAR

28
Q

What is the CORR equation?

A

CORR(rA,rB) = COV(rA,rB) / σA σB
ρA,B = same thing

29
Q

What letter represents CORR?

A

ρ

30
Q

What does w = in portfolio theory?

A

w= the % share of a security in a portfolio

31
Q

What equation can you use to work out the rate of return of a portfolio?

for this eg the portfolio has just 2 assets

A

rp = wA rA + wB rB

all rs have a line above them

32
Q

what do all w’s in a portfolio add up to?

A

1

33
Q

If pA,B = 1, then what is the SD of a portfolio?

A

σp = wAσA + wBσB

34
Q

If pA,B = -1, then what is the SD of a portfolio?

A

σp = wAσA - wBσB

difference between the weighted SDs

35
Q

What does the portfolio SD of perfectly negatively correlating securities equal when combined?

A

SD of P = 0

36
Q

What is the equation of the CML?

A

E(Rf) = [Rf + (E(R.M) - R.F) ] / σ.M, all multiplied by σ.P

the slope is just the middle bit aka market price of risk & Sharpe ratio

37
Q

What is the market price of risk equation?

A

E(rf) = ( E(RM) - RF ) / σ.M

38
Q

What is the beta equation?

A

beta = Cov (R.i, R.M) / σ (R.M)

In other words, it is the Covariance of the return of a security and the market portfolio divided by the variance of the return of the market portfolio

39
Q

What equation do you use to work out a single securities expected rate of return?

This is the CAPM

A

Ri = R.F + B.i x (R.M - R.F)

risk-free rate + Beta of security x Market risk premium

40
Q

Notation for options, what does S.T mean ?

A

Value / price of the underlying at expiry

41
Q

Notation for options, what does T and E mean?

A

T is expiry
E is exercise price

42
Q

What is the payoff equation of options?

A

(S.T - E)* shares owned

43
Q

How do you work out the redemption yield?

A

r = C+V / P -1

44
Q

What is the Fisher equation and what’s it used for?

A

1+r.nominal = (1+r.real)(1+inflation)

finding normal or real redemption yields

Financial Economics (11 decks)

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