FoF - Unit 2

Question 1

Future Value

Answer 1

measures the nominal future sum of money that a given sum of money today is “worth” at a specified time in the future assuming a certain rate of return.

FV=PV x (1+r)^T

Question 2

Discount factor (Present Value Factor)

Answer 2

1/(1+r)^t

Question 3

Arbitrage pricing theory (APT)

Answer 3

is a multi-factor asset pricing model based on the idea that an asset’s returns can be predicted using the linear relationship between the asset’s expected return and a number of macroeconomic variables that capture systematic risk.

Question 4

Present Value

Answer 4

PV=FV / (1+r)^t

Question 5

Yeild (not coupon) Formula

Answer 5

r = (FV/PV)^1/t -1

Question 6

For a bond, the yield is also called ________________

Answer 6

yield to maturity (YTM)

Question 7

For single payment bond, the interest rate and the ________ are the same thing. Mor complicated for multiple-payment bonds

Answer 7

yield

Question 8

Equations for Time

Answer 8

t= log(FV/PV) / log(1+r)

Question 9

zero coupon bond

Answer 9

a bond that pays no interest/coupon, only the face value at maturity. Lower interest rates the higher PV/price of bond will be

Question 10

multiple payment security (bond)

Answer 10

collection of zero coupon bonds.

PV= C0 + C1/(1+r) + Ct/(t+r)
FV= C0(1+r)^t + C1(1+r)t-1 + … + Ct

Question 11

perpetuity (consol)

Answer 11

a bond that pays a fixed payment C forever. No principal payment. By convention, the payment in the current period has already happened
PV=C/r (diff. if starting in 10 years)

Question 12

annuities

Answer 12

pays a fixed cash flow C for T periods

PV= C(1/r -1/r(1+r)^t)

Question 13

Calculating Returns: Compounding

Answer 13

Annual Percentage rate (APR)
Effective annual rate (EAR)

Question 14

Calculating Returns: Single-period realized return

Answer 14

(annualized) holding period return (HPR)

Question 15

Calculating Returns: Multi-period returns

Answer 15

arithemetic average
geometric average
internal reate of return (IRR)

Question 16

Annual Percentage Rate (APR)

Answer 16

lenders are required by law to report APR

APR = (rate per period)(# of periods per year)

Question 17

Effective annual rate (EAR)

Answer 17

if interest is compounded m times a year:

EAR = (1 + APR/m)^m -1

Question 18

Holding Period Return (HPR)

Answer 18

is the rate (return) that your initial investment earned in order to generate the final value of the investment. Reflects both change in the resale value, and any cashflows

HPR = (ending price + ending cash dividens / beginning price ) -1

Question 19

Ann HPR

Answer 19

is the corresponding rate per year (annual return)

annHPR = (1+ HPR)^1/T -1
(other equations on Onenotes)

Question 20

geometic avg.

Answer 20

= [(1+r)…(1+rt)] ^ 1/t -1

Question 21

Internal Rate of Return (IRR)

Answer 21

that solves the equation. Equates the initial price to the PV of all future cash flows.

“Dollar-weighted” average return

In the context of a bond, IRR is call the yield