Flashcards in Quantitative Methods I Deck (16):

1

## Real risk free rate

### Theoretical rate with no expectation of inflation (i.e. after inflation)

2

## Nominal risk free rate

###
Real risk free rate + inflation

T-bills, for example, include inflation premium

3

## Required interest rate

###
nominal risk free rate +

default risk premium +

liquidity premium +

maturity premium

4

## Effective annual rate

###
(1+periodic rate) ^ (m-1)

I.e. compounding monthly for actual annual rate

5

## Normal annuity

### Cash flows occur at the end of each period

6

## Annuity due

###
Cash flows occur at the beginning of each period

Make sure calc is set to beginning

7

## Perpetuity

###
Pays fixed amount at set intervals for an infinite (perpetual) period

PV = Payment / rate of return

8

## Amortization table

###
1. Use tmv functions to calculate payments

2. Interest = beginning balance * periodic interest rate

3. Principal = payment - interest

4. Ending balance = beginning - principal

9

## NPV rule

###
1. Accept projects with positive NPV; increase shareholder value

2. When two projects are mutually exclusive, accept higher NPV

10

## IRR rule

### Accept projects with IRR > required return only

11

## Problems with IRR

###
1. Always accept greatest NPV, when IRR and NPV conflict.

2. IRR assumes reinvestment at the discount rate

12

## Holding period return (HPR or HPY)

### (ending value - beginning value + cash received) / beginning value

13

## Bank Discount Yield (BDY)

### [(face value - purchase price) / (face value)] * (360 / days until maturity)

14

## Effective Annual Yield (EAY)

###
(1+HPR)^(365/t)-1

Basic annualization based on 365 year

15

## Money Market Yield (CD Equivalent)

###
(360 / # of days) * HPY

Doesn't account for compounding

16