Chapter 1 Flashcards
Formula for the nth term of an Arithmetic Series.
an = a1 + (n - 1)d
What is the formula for the sum of the first n terms of an arithmetic series?
Sn = (a1 + an)n/2
What is the formula for the nth term of a geometric series?
an = a1qn-1
What is the formula for the sum of the first n terms of a geometric series?
When and what will a geometric series converge to?
Only converges when |q| < 1
Show the compound interest formula.
Where:
R is the annual interest rate.
m is the number of times the investment is compounded in a year.
t is the time invested in years.
What is the continuous compounding interest formula?
Show the formula for compound interest at a variable rate.
Show the formula for continuously compounding interest at a variable rate
How can we discount a future value?
By removing V0 from a compounding formula, then inverting it, and multiplying by Vt.
What is a perpetuity, and an annuity?
Annuity: A constant revenue flow that lasts for T years.
Perpetuity: A constant revenue flow that lasts forever.
By what process are bonds priced?
The bond price is the sum of the net present value of all future cash flows, i.e. the interest and the principal repayment.
Each cash flow is discounted at the zero-coupon rate for the time it is recieved.
A table of these zero-coupon rates is called a yield curve.
What is the yield of a bond?
The constant discount rate that equates the bond price with its market value.
What is the duration of a bond?
Give the formula.
A weighted average of the timing of its cash flows.
The lower the duration, the quicker a bond gives it’s return -> less risk involved.
