General Cash Flows and Portfolios Flashcards
Rate of Return
The gain or loss on an investment over a specified period, expressed as a percentage increase over the initial investment cost. Gains on investments are considered to be any income received from the security plus realized capital gains.
(Final sale cost - Initial Cost) / Initial Cost
Basically, it is yield for anything.
Dollar Weighted Rate of Return
it is the discount rate on which the NPV = 0 or the present value of inflows = present value of outflows - Same as Internal Rate of Return
Calculated using Financial Calculator - http://www.actuarialoutpost.com/downloads/baiiplus.pdf
Time-Weighted Rate of Return
How much a dollar would grow to in a period. Uses time instead of money as the weight.
HPR = ((MV1 - MV0 + D1 - CF1)/MV0)
Where: MV0 = beginning market value, MV1 = ending market value D1 = dividend/interest inflows, CF1 = cash flow received at period end (deposits subtracted, withdrawals added back)
Compounded Version =[ (1 + HPR1) * (1 + HPR2) and so forth) ] - 1
Annualized = (( 1 + compounded version ) ^ (1 / y)) - 1
Portfolio
A grouping of financial assets such as stocks, bonds and cash equivalents, as well as their mutual, exchange-traded and closed-fund counterparts. Portfolios are held directly by investors and/or managed by financial professionals.
spot rate
The price quoted for immediate settlement on a commodity, a security or a currency. The spot rate, also called “spot price,” is based on the value of an asset at the moment of the quote. This value is in turn based on how much buyers are willing to pay and how much sellers are willing to accept, which depends on factors such as current market value and expected future market value. As a result, spot rates change frequently and sometimes dramatically.
forward rate
A rate applicable to a financial transaction that will take place in the future. Forward rates are based on the spot rate, adjusted for the cost of carry and refer to the rate that will be used to deliver a currency, bond or commodity at some future time. It may also refer to the rate fixed for a future financial obligation, such as the interest rate on a loan payment.
An agreement to pay or buy at a certain rate.
stock dividend
A dividend payment made in the form of additional shares, rather than a cash payout.
A dividend is a distribution of a portion of a company’s earnings, decided by the board of directors, to a class of its shareholders. Dividends can be issued as cash payments, as shares of stock, or other property.
yield curve
A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity dates. The most frequently reported yield curve compares the three-month, two-year, five-year and 30-year U.S. Treasury debt. This yield curve is used as a benchmark for other debt in the market, such as mortgage rates or bank lending rates. The curve is also used to predict changes in economic output and growth.
Macaulay Duration
The weighted average term to maturity of the cash flows from a bond. The weight of each cash flow is determined by dividing the present value of the cash flow by the price, and is a measure of bond price volatility with respect to interest rates.
higher duration means more volatile and lower duration means less volatile.
Σ( t * CF(t) * v^t ) All present current value of bond.
modified duration
Modified duration follows the concept that interest rates and bond prices move in opposite directions. This formula is used to determine the effect that a 100-basis-point (1%) change in interest rates will have on the price of a bond.
Modified Duration = Macaulay Duration * v
Macaulay Duration of a n-year zero coupon bond
n
Macaulay Convexity
Σ( t^2 * CF(t) * v^t ) All over present current value of bond.
Macaulay Convexity of a n-year zero coupon bond
n^2
Convexity
Σ t * (t + 1) * v^(t + 2) * CF(t) All over present current value of bond
Estimated Change in Price due to change in interest Rates
P(i) * ((delta i) * ModD + (1/2)((delta i)^2) * Conv)
