The Time Value Of Money Flashcards
Face Value (par)
Amount the lender promises to pay back.
Bank Discount Basis
r = (D/F) (360/t)
bd
D= discount in dollars F= face value t= number of days til maturity
A quoting convention that annualizes, on a 360 day year, the discount as a percentage of face value.
Growth Rate Formula
1/n
r = (FVn/PV) - 1
Present Value of an Infinite Series of Cashflows (Perpetuity)
PV = A/r
Present value of a single cash flow
-n
PV = FV (1+r)
Future value of an ordinary annuity
N
FV = A((1+r) -1)/r)
Continuous compounding EAR
rs
EAR = e -1
Effective annual return (EAR)
m
EAR = (1+periodic interest rate) -1
Future value of a continuously compounding single cash flow
rsN
FV = PVe
Future value of a single cash flow
N
FV = PV (1+r)
IRR rule
Accept all projects with an IRR exceeding the required rate of return.
Present value of a series of cash flows (annuity)
-n
PV = A ((1-(1+r) )/r)
Money Market Yield (CD equivalent yield)
r = 360 (rbd)/360-(t)(rbd)
mm
A yield on a basis comparable to the quoted yield on an interest bearing money market instrument that pays interest on a 360 day basis.
The annualized holding period yield.
Time weighted return
Geometric mean of the HPRs
Internal Rate of Return (IRR)
The rate of return that makes NPV = 0. Discount rate needed to make outflows equal to inflows.
Net present value (NPV)
The difference between an investments cash inflows minus the present value of its inflows.
NPV rule
An investment should be undertaken if it’s NPV is positive, and not undertaken if negative.
Pure discount instruments
Instruments that pay interest as the difference between the amount borrowed and amount payed back. (US T-Bills)
Holding period return (HPR)
HPR = (P1-P0+D)/P0
Money Market
The market for short term debt instruments (one year maturity or less)
Money weighted return
The IRR of a portfolio, taking into account all cash flows
Effective annual yield
365/t
EAY = (1+HPY) -1
An annualized return that accounts for the effect of interest on interest
Holding period yield
HPY = (P1-P0+D)/P0