Time Value of Money, Future Value, Holding Period Returns

Question 1

Time value - Effective rate of return

Answer 1

(1+r)ⁿ

1. calc the rate being compounded
2. convert to decimal
3. perform the calc
4. minus 1 and x100

Question 2

Time value - Future value

Answer 2

FV = PV(1 + r)ⁿ

1. calc effective rate of return
2. times PV by it

Question 3

Time value - Present value

Answer 3

FV
(1 + r)ⁿ

1. Reverse of future value

Question 4

Finding the annual interest rate

Answer 4

r = [(FV / PV)^1/n - 1] x 100
1. FV/PV
2. ANS to the power of 1/n
3. minus 1 and times by 100

Question 5

Measuring risk and return - Holding period return

Answer 5

(D + V1 ) – V0 -C
V0 + C

• D = Income Generated
• V1= Value at end of period
• V0= Value at start of period
• C = Additional capital introduced

Question 6

Measuring risk and return - MWR

Answer 6

D + V1– V0- C
V0 + (C x n/12) - (D x N/12)

n = No of months money was in the fund
N = the No of months the money was not in the fund

Question 7

Time weighted return - TWR

Answer 7

V1 x V2
V0 x (V1+C)

-1
x100

• C = New money (net) invested during the period
• V0 = value of portfolio at the start of the period
• V1 = value of the portfolio before the addition is made
• V2 = value of the portfolio at the end of the period.

Question 8

MWR v TWR

Answer 8

• Time-Weighted: Time-weighted rates of return do not take into
  account the impact of cash flows into and out of the portfolio (ie
  excludes any income received )
• Money-Weighted: Money-weighted rates of return do take into
  account the impact of cash flows into and out of the portfolio.(ie
  includes any income)
• If there are no cash flows (cap withdrawn or introduced or
  income) in or out of the portfolio during the period being measured,
  both money-weighted and time-weighted rates of return will be the
  same.