Equations

Question 1

What is the Bank Discount Yeild equation?

Answer 1

rBD = the annualized yield on a bank discount basis
D = the dollar discount, which is equal to the difference between the face value of the bill, F, and its purchase price, P
t = the number of days remaining to maturity
360 = the bank convention of the number of days in a year.

Question 2

Why is the Bank Discount Yield NOT a meaning measure for return on an investment?

Answer 2

1. It is based on the face value, not on the purchase price. Instead, return on investment should be measured based on cost of investment.
2. It is annualized using a 360-day year, not a 365-day year.
3. It annualizes with simple interest, and ignores the effect of interest on interest (compound interest).

Question 3

What is the Holding Period Yield equation?

Answer 3

P0 = the initial price of the instrument
P1 = the price received for the instrument at its maturity
D1 = the cash distribution paid by the instrument at its maturity (that is, interest).

Note that HPY is computed on the basis of purchase price, not face value. It is not an annualized yield.

Question 4

What is the effective annual yield? What is it’s equation?

Answer 4

The annualized HPY on the basis of a 365-day year and incorporates the effect of compounding interest.

Question 5

What is the Money Market Yield? What is it’s equation?

Answer 5

1. (also known as CD equivalent yield)
2. The annualized HPY on the basis of a 360-day year and uses simple interest.

Question 6

If the Holding Period Yield is known, how is Effective Annual Yield computed?

Answer 6

EAY = (1 + HPY)365/t - 1

Question 7

If the Holding Period Yield is known, how is Money Market Yield computed?

Answer 7

rMM = HPY x 360/t

Question 8

If Effective Annual Yield is known, how is Holding Period Yield computed?

Answer 8

HPY = ( 1 + EAY)t/365 - 1

Question 9

If Effective Annual Yield is known, how is the Money Market Yield calculated?

Answer 9

rMM = [(1 + EAY)t/365 - 1] x (360/t)

Question 10

If Money Market Yield is known, how do you calculate Holding Period Yield?

Answer 10

HPY = rMM x (t/360)

Question 11

If Money Market Yield is known, how do you calculate Effective Annual Yield?

Answer 11

EAY = (1 + rMM x t/360)365/t - 1

Question 12

The required rate of return on a security = ?

Answer 12

= real risk-free rate + expected inflation + default risk premium + liquidity premium + maturity risk premium.

Question 13

The nominal risk-free rate = ?

Answer 13

= real risk-free rate + expected inflation rate

Question 14

Future Value = ?

Answer 14

Future value: FV = PV(1 + I/Y)N

Question 15

Present value: PV = ?

Answer 15

Present value: PV = FV / (1 + I/Y)N

Question 16

What is the equation for the present value of a perpetual annuity?

Answer 16

Question 17

Bond equivalent yield = ?

Answer 17

Bond equivalent yield = [((1 + effective annual yield)^½ )− 1] × 2

Question 18

What is the equation that represents a future value factor?

Answer 18

(1+I/Y)²

Question 19

What is another term for “future value factor”?

Answer 19

It can also be referred to as “future value interest factor”

Question 20

What is the equation for the FV of a single sum?

Answer 20

FV=PV(1+I/Y)²

Question 21

What is the equation for the PV of a single sum?

Answer 21

PV=FV/(1+I/Y)²

Question 22

What is “1/(1+I/Y)^N” known as?

Answer 22

1. Present value factor
2. Present value interest factor
3. Discount factor

For a single cash flow..

Question 23

What is the formula for the geometric mean?

Answer 23

Question 24

What is the weighted mean formula?

Answer 24

Question 25

What is the harmonic mean formula?

Answer 25

Question 26

What is the Mean Absolute Deviation?

Answer 26

1. The average values of the deviations for the arithmetic mean.
2. The closer the MAD is to zero, the more consistent the data.