Quantitative Methods Flashcards
What are the three ways to “define” an interest rate?
- Rate of return required in equilibrium for a particular investment,
- The discount rate for calculating the present value of future cash flows,
- The opportunity cost of consuming now, rather than saving and investing.
The effective annual rate = ?
- Where m = compounding periods
- Measures the amount each dollar will grow in one year
How do you edit the “effective annual rate” equation for non-annual TVM problems?
For non-annual time value of money problems, divide the stated annual interest rate by the number of compounding periods per year, m, and multiply the number of years by the number of compounding periods per year.
What is the equation for the present value of a perpetual annuity?
What is an annuity?
- An annuity is a series of equal cash flows that occurs at evenly spaced intervals over time.
What is the “NPV rule”?
To accept a project if NPV > 0
What is the “IRR rule”?
To accept a project if IRR > required rate of return
What is NPV?
- Net Present Value
- The present value of a project’s future cash flows, discounted at the firm’s cost of capital, less the project’s cost
What is the “holding period yield”?
The total return for holding an investment over a certain period of time and can be calculated as:
Holding period yield = ?
Money market yield = ?
Money market yield = holding period yield × (360/n)
Effective annual yield = ?
Effective annual yield = (1 + holding period yield)^365/n − 1
Holding period yield = ?
Holding period yield = (1 + effective annual yield)^n/365 − 1
What does the term discounting describe?
The process of finding the PV of a cash flow.
The interest rate used in the discounting process is commonly referred to as?
- Discount rate(most common)
- Opportunity cost
- Required rate of return
- Cost of capital
What are the two types of annuities?
- Ordinary annuities
- Annuities due
What is an ordinary annuity?
- Most common type of annuity
- Typical cash flow pattern for many business/finance applications
- Cash flows occur at the END of each period
What is an annuity due?
Annuity where payments or receipts occur at the beginning of each period(t=0)
What are the two definitions of amortization?
- The paying off of debt in regular installments over a period of time.
- The deduction of capital expenses over a specific period of time (usually over the asset’s life). More specifically, this method measures the consumption of the value of intangible assets, such as a patent or a copyright.
What are descriptive statistics? Inferential statistics?
Descriptive statistics summarize the characteristics of a data set; inferential statistics are used to make probabilistic statements about a population based on a sample.
What are the four major categories of measurement scales?
- Nominal scale
- Ordinal scale
- Interval scale
- Ratio scale
What is a nominal scale?
- A scale where data is put into categories that have no particular order.
- Ex: Assigning a value of 1 to a Muni Bond Fund, 2 to a Corp Bond Fund, Etc.
What are ordinal scales?
- Scale where data is put into categories that can be ordered with respect to some characteristic.
- Ex: Assigning 1 to the top 100 performing stocks, 2 to the next 100 top performing stocks, etc.
- With this type of scale you can infer that a ranking of 1 is better than 2, but you can not quantify the degree that a 1 is better than a 2.