Exam Prep - Need To Knows Flashcards
Price elasticity of demand
% Change in Demand / % Change in Price
What are the maturities of short, medium and long dated gilts?
Short dated: less than 7 years to redemption
Medium dated: 7 to 15 years
Long dated: over 15 years
What are the main features of a REIT?
- 90% of income must be paid out for tax benefits.
- 75% of assets must be property related.
- Each investor cannot own more than 10%.
- Must own at leat 3 properties, no holdings over 40% of the NAV.
- No CGT within REITs.
What is the CAPM formula and inputs?
CAPM = Risk free rate + beta x (Market return - risk free rate)
Market return - risk free rate = the market risk premium.
What is the formula to rebase an index?
New base / old base x Period X = New index number for period X.
The start value is the index number at the base year.
What is the Sharpe ratio?
Sharpe ratio = Portfolio return - risk free rate / Standard deviation.
It provides the portfolio return per unit of risk.
What is the Treynor ratio?
Treynor ratio = Portfolio return - risk free rate / beta.
What is the Jensen measure?
Jensen measure = Portfolio return - CAPM.
What is the information ratio?
Information ratio = Portfolio return - Bmk return / standard deviation of surplus returns.
The standard deviation of surplus return is also known as the tracking error or active risk.
I.e. Excess return / st deviation of excess return.
What is the formula for Macaulay Duration?
Macaulay Duration = ∑ Time weighted cash flows / ∑ PV of cash flows
What is the Modified Duration formula?
Modified duration = Macaulay duration / 1+yield
MD overestimates price falls and underestimates rises (pessimistic), due to convexity of the yield curve.
How do you calculate the yield on T-bills?
T-Bill yield = Price - par / price+1 x 365 / no. of days til redemption -1 x 100
Compound T-Bill yield = Price - par / price+1 ^365/no. days til redemption -1 x 100
I.e you find the rate of return and multiply by 365/n or take it to the power of 365/n for compounding. This is also the formula for annual return.
How is the geometric mean calculated?
Geometric mean = (1+r) x (1+r)^1/n
If they are not percentage figures you do not need to add one to each value, simply multiply them and take them to the power of 1 / n.
What is the annuity formula?
CF x 1/r x (1 - 1/(1+r)^n
When using the annuity formula for fixed income, the coupon is simply the CF and you add this to the capital yield over 1 + r^n.
How is the APR calculated?
APR = (1 + monthly rate)^12 - 1
What is the lowest rating for an investment grade bond?
S&P: BBB-
Moody’s: Baa3
Fitch: BBB
What is the perpetuity formula?
Price = Coupon / yield.
Undated bonds are valued using the perpetuity formula.
How can you calculate future spot rates in the FX market?
Future spot rate = Spot rate x (1+quoted rate / 1+base rate)
What is the formula for the Gordons Growth Model?
(Ex-div) Price = Dividend x (1+growth rate) / (required return - growth rate)
How is the GRY calculated?
GRY = ∑ Coupon / (1+r)^ +… including principal in the final payment.
GRY aka YTM.
If you are given the price and coupon rate, to find IRR you must find the rate (r) figure by trial and error until it discounts the cash flows & principal back to the price that’s given.
What do these derivatives terms represent:
Delta -
Theta -
Vega -
Rho -
Delta - Option price relative to underlying asset price.
Theta - Option price relative to time.
Vega - Option price relative to volatility of underlying asset.
Rho - Option price relative to interest rates.
How is the multiplier found?
The multiplier is found by taking 1 divided by the Marginal Propensity to Save.
1 / MPS
How do you calculate a bond’s price for a certain required return?
Calculate the sum of the coupons for each year including the principal in the final year, divided by 1 + required return (e.g 1.08 / 8%) at each year.
How is the flat yield calculated for a bond?
The flat yield is found by simply dividing the gross annual coupon by the price of the bond, x 100 for the percentage figure.
AKA ‘running yield’ or ‘coupon yield’.
3 month indexation lag on index linked bonds.
How is the inter quartile range calculated?
The median of the last quartile - the median of the first quartile.
How is straight line depreciation calculated?
Annual depreciation = Original cost - residual value / lifetime
How is the reducing balance method of depreciation calculated?
1 - n to the root of the residual value over the original cost.
How do you calculate the number of contracts to hedge a portfolio?
No. of contracts = Cash exposure face value / Futures contract face value x beta
The FTSE 100 futures are quoted at 10 pounds, therefore index points x 10 = price per point. You must then multiply the contracts by the beta to find the beta hedge.
Short sterling contracts cost 12.50 pounds per basis point.
How do you find the compound growth rate between two periods of return?
Compound growth rate = (End value / Start value)^1 / n
Don’t forget to include the nominal value when discounting or finding the price of a bond!
How can you find the IRR figure for the present value of a zero coupon bond?
IRR = (Par value / Price)^ 1 / n
Subtract 1 and multiply by 100 and this is you IRR %.
How to calculate the forward exchange rate using the interest rate parity formula?
Forward rate = Spot rate x (1+quoted inflation rate / 1+base inflation rate)
How is the change in price of a bond calculated using Modified Duration?
∆Price = -MD x ∆interest rate x price.
The MD is entered as a negative figure to take account of the negative price/yield relationship, showing that bonds price falls as interest rates rise.
