Present value and Bond valuation

Question 1

Simple interest formula

Answer 1

FV = PV x (1 + iT)

Question 2

Compounding interest formula

Answer 2

FV=PV (1+i)^T

Question 3

Continuous compounding interest

Answer 3

FV=PVe^iT

Question 4

FV of annuity

Answer 4

C x (((1+r)^T)/r - 1/r)

Question 5

PV of growing annuity

Answer 5

C(1/r-g - (((1+g)/(1+r))^T)/r-g)

Question 6

Approx YTM formula

Answer 6

(C + (F-P/T)) / F+P/2

Question 7

Perpetuity definition

Answer 7

Cash flow is theoretically received forever

Question 8

Growing perpetuity definition

Answer 8

Cash flows grow at a fixed growth rate for forever

Question 9

Annuity defintion

Answer 9

An asset that pays a fixed sum each year for a specified number of years

Question 10

Bond definition

Answer 10

A debt instrument requiring the borrower to repay to the lender the amount of borrowing plus interest over a specified period of time

Question 11

Zero coupon bonds

Answer 11

Single payment at a future date

Question 12

Level coupon bonds

Answer 12

Cash payments at regular times in between maturity

Question 13

Consols

Answer 13

Bonds that never stop paying a coupon, have no final maturity date

Question 14

YTM definition

Answer 14

Expected return on a bond if the bond is held until its maturity

Question 15

Par bond

Answer 15

YTM = coupon rate
price = face value

Question 16

Discount bond

Answer 16

YTM > coupon rate
price < face value

Question 17

Premium bond

Answer 17

YTM < coupon rate
price > face value

Question 18

Four basic principles

Answer 18

• Money has a time value
• There is a risk-return trade off
• Cash flows are the source of value
• Market prices reflect information