Formulas Flashcards
Real Rate of Return
[1+Nominal Rate] /
[1+Inflation Rate]
- 1 x 100
Arithmetic Average
Σ+
Σ+
Σ+
Shift 7 (x-,y-)
Standard Deviation
Σ+
Σ+
Σ+
Shift 8 (Sx,Sy)
Holding Period Return
Beg Value
Profit / Sale
Geometric Return
[[[(1+R1)(1+R2)(1+R3)] ^ 1/3 ] - 1] x 100 (Provided on CFP)
Used Shift x (multiply sign) (y^x) to get the exponent
-1 x 100
Intrinsic value of a bond
Calculate PV (FV and PMT are positive; N x 2 and Yield to Maturity should be divided by 2)
Use % for coupon to calculate coupon payments
Use “comparable market rate” divide by 2 as I/YR for PV calculate
intrinsic value of a bond represents the present value of its future cash flows, which are the coupon payments and the principal payment at maturity.
The present value of the cash flows is calculated using the bond’s yield to maturity, which is the rate of return that investors require for investing in the bond
YTC or YTM of a Bond
Calculate I/YR (remember to x 2 to get to final answer)
(PV will be provided, should be negative, N x 2, FV and PMT postive)
For YTC, use FV and N for callable
Monthly Mortgage Payments
PV = +/- Loan amount
N = loan term x 12
I/YR = mortage interest rate / 12
FV = 0
Solve for PMT
Net Present Value
Use CFj Key to enter the cashflows (starting with the purchse price and ending with selling price)
Use I/IR to enter the %
Shift PRC (NPV)
Constant Growth Dividend Discount Model (DDM)
V = D1 / (r-g)
D1 = next year’s dividend
r = the investor’s required rate of return
g = the dividend growth rate
Calculates the value of a dividend-paying security (with constant dividend growth) in dollar terms
Stock Valuation Steps
V = D1 / (r-g)
Step 1: Calculate end-of year dividends for first set of years where dividend is constant
D1 = D0 x (1 + g (Growth Rate))
D2 = D1 x (1+g)
D3 = D2 x (1+g)
Step2: Calculate the stock valuation at the last year based on new constant divident/projected dividends rate
V = D3 (1 + Projected dividend rate) / (Required Rate of Return - Projected Dividend Rate)
Step 3: Solve for NPV
I/YR = Required Rate
CF0 = 0 (zero entry)
CF1 = D1
CF2 = D2
CF3 = D3 + V
Shift PRC/NPV
When should Investor avoid the stock?
When IV < MV, Stock is overvalue, Er < K = avoid stock
When should investor buy the stock?
When IV > MV, Stock is undervalued & Er > k = buy stock
When IV = MV, stock is fairly valued & Er = K = buy stock
What is IV, MV, Er and K
IV = Intrinsic Value
MV = Market Value
Er = Expected return
k = required return
Expected Rate of Return
