Quantitative Methods I Flashcards Preview

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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

Bond equivalent yield (BDY)

2 * semiannual discount rate

Basically the compound semi-annual rate * 2, so not compounded over those periods.