IAD Questions - Equations Flashcards
Annual Effective Rate (AER)
(Eg. Annual rate is 7% and compounded semi-annually)
{Rate / Period}, +1, ^Periods
Flat Yield
(Eg. Treasury 4% with 4yrs left to maturity and market value of £103.50)
Rate / Value
Gross Redemption Yield (GRY)
(Eg. 9yr 3.5% bond at £107)
Value - Par/Period/Value x 100
Real Returns
(Eg. Savings account paying 5% nominal and assuming 2.5% inflation)
1+Nominal / 1+Inflation
CAPM
(Eg. Market average is 10.5%, risk-free is 2.4% and Beta of portfolio is 1.3)
RiskFree + (MarketRate - RiskFree)Beta
Time-weighted rate of return
(End1/Start1) x (End2/Start2) -1 x100
Present Value of Perpetuity
(Eg. £1500 paid annually, assuming 7% interest)
Annual payment / Rate
Present value of Annuity
(Eg. 3yr annuity of £170pa, assuming 5% interest rate)
Annual payment x 1/Rate x 1-1/1+Rate^Period
Net Asset Value (NAV)
(Eg. Assets of £15m, liabilities of £6m, 2m shares in issue)
Assets - Debt / Total shares
Future Value
(Eg. £2000 earning 10%pa, what’s worth in 3yrs)
Deposit x 1+rate ^ period
Present Value
(Eg. £75k received in 8yrs, interest of 8%)
Future Value/ 1+rate ^ period
Earnings Per Share (EPS)
Profits / shares
Dividend Yield
Dividend per share / price
Price/Earnings Ratio
(Eg. Profits £4m, 2m shares, share price £9.50)
EPS / Price
Dividend Cover
EPS / Dividend per share
Gearing Ratio
(Eg. Total debt £8m of which £2.5m due within 1yr, equity of £4m)
Long-term debt / Debt + Equity
What are the CAPM assumptions?
All participants can borrow and lend at the risk-free rate
No taxes or transaction costs
All participants have the same expectations
What is the purpose of the Gearing Ratio?
Measures financial risk for shareholders
What is the purpose of the Price/Earnings Ratio?
Valuation/Checking the current price of the company. (Ie how long to get investment back)
What is the purpose of the Dividend Cover?
How sustainable is the current dividend
What is the purpose of the Earnings Per Share calculation?
Checks profitability of the company
What is the purpose of the Time-weighted Rate of Return calculation?
Works out return over period to analyse performance, taking into account deposits & withdrawals (that would distort the calculation)
Explain quarter up calculation for IHT purposes
(Eg. Closing price is 300-304)
Calculate difference between Bid/Offer at CLOSE
Divide this by quarter
Add to the bid
Holding Period Return
(ValEnd - ValStart) + income / ValStart
