L3 - Time Value of Money Flashcards
1
Q
How do you calculate the value of an Annuity?
A
2
Q
How do you calculate EAR?
A
- compounded daily where m = 250?
- EAR when compounded continuously = ei - 1
3
Q
What is APR?
A
- Lenders are required by law to report the APR
- APR = Quoted rate = interest per period * number of periods per year
4
Q
How do you calculate single period realised returns?
A
t = no of years ==> 1 month would mean t = 1/12
5
Q
How do you calculate multiple period realised returns?
A
- Arithmetic Average of previous returns
- Normally used as a forecasting device for the next period’s returns
- Not equivalent per period returns because it neglects to compound
- useful for forecasting the return next period
- Normally used as a forecasting device for the next period’s returns
- Geometric average is good for evaluating portfolio returns as it take into account the compounding over time
6
Q
How can you use IRR to calculate multi-period realised returns?
A
- IRR is the average of the rates of returns
