Module 2.1 - Discounted Cashflow Valuations

Question 1

What is the equation for PV(Present Value)?

Answer 1

= FV / (1+r) ^ t

-or-

= FV (1+r) ^ -t

Question 2

What is the equation for FV (future value)?

Answer 2

= PV (1+r) ^ t

Question 3

What is the equation FV for continuous compounding?

Answer 3

= PV (1 + e^ rt)

r= period rate
t = # of compounding periods

Question 4

What is the equation PV for continuous compounding?

Answer 4

= FV / e^ rt

-or-

= FV ( e^ -rt)

Question 5

Do negative yields exist?

Answer 5

Yes. This typically means bond is selling at premium to face value.

Question 6

Define an amortizing bond.

Answer 6

Amortizing bond is one that pays a level amount each period including the maturity period.

Question 7

Compare Amortizing Bond vs Fixed Coupon Bond

Answer 7

Amortizing Bonds have payments that includes principal payments.

Fixed Coupon Bonds the principal is paid to the investor at maturity.

Question 8

Equation to calculate annuity payment

Answer 8

Question 9

Equation for preferred stock valuation

Answer 9

Dividend per period / Market required return on stock

Question 10

Equation for constant growth DDM

Answer 10