Formulas

Question 1

PV on a loan

Answer 1

CF / (1 + i)^n

Question 2

YTM on a simple loan

Answer 2

P = CF / (1 + i)^n

Question 3

YTM on a fixed payment loan

Answer 3

P = FP / (1 + i) + … + FP / (1 + i)^n

Question 4

YTM on a coupon bond

Answer 4

P = C / (1 + i)^n + … + FV / (1 + i)^n

Question 5

YTM on a perpetuity

Answer 5

P = C / i
(price = yearly payment / YTM)

Question 6

YTM on a discount bond

Answer 6

i = (F - P) / P
(F is face value; P is current price)

Question 7

Rate of return

Answer 7

C+ (Pt+1 - Pt) / Pt
(C is coupon; Pt current payment; Pt+1 payment for next year).

R= ic + g
(current yield + rate of capital gain)

Question 8

Rate of capital gain

Answer 8

Percentage change of bond’s price

Question 9

Fisher equation

Answer 9

i = r + π ^e
(nominal interest rate = real interest rate + expected inflation)

Question 10

Expectation theory

Answer 10

i(nt) = (it + ie(t+ n-1)) / n
(average of short-term interest)

Question 11

Liquidity premium theory

Answer 11

i(nt) = [(it + ie(t+ n-1)) / n] + l(nt)
(expectation theory + liquidity p.)

Question 12

One-period valuation model

Answer 12

P = D1/(1 + ke) + P1/(1 + ke)

Question 13

Generalized dividend valuation model

Answer 13

P = (sigma) Dt / (1 + ke)^t

Question 14

Gordon growth model

Answer 14

P = D1 / (ke – g)