Do you want BuboFlash to help you learning these things? Click here to log in or create user.

Tags

#6-revisiting-demand-function #cfa #cfa-level-1 #economics #has-images #microeconomics #reading-14-demand-and-supply-analysis-consumer-demand #study-session-4

Question

What’s left of his response must be due to the [...] **effect**. So, we say that the **[...]** effect is shown by the move from point *a* to point *b*.

If his**[...]** were then restored, the resulting movement from point *b* to point *c* must be the **[...]**

If his

Answer

substitution

income reduction

status | not learned | measured difficulty | 37% [default] | last interval [days] | |||
---|---|---|---|---|---|---|---|

repetition number in this series | 0 | memorised on | scheduled repetition | ||||

scheduled repetition interval | last repetition or drill |

reduction. If the income reduction is just sufficient to leave him no better or morse than before the price change, we have removed the real income effect of the decrease in price. What’s left of his response must be due to the <span>substitution effect . So, we say that the substitution effect is shown by the move from point a to point b. If his income reduction were then restored, the resulting movement from point b to point

Tags

#cfa #cfa-level-1 #economics #reading-15-demand-and-supply-analysis-the-firm #section-3-analysis-of-revenue-costs-and-profit

Question

If total [...] exceeds total revenue in the long run, the firm will exit the market as a business entity to avoid the loss associated with fixed cost at zero production.

Answer

variable cost

status | not learned | measured difficulty | 37% [default] | last interval [days] | |||
---|---|---|---|---|---|---|---|

repetition number in this series | 0 | memorised on | scheduled repetition | ||||

scheduled repetition interval | last repetition or drill |

firm must cover variable cost before fixed cost. In the short run, if total revenue cannot cover total variable cost, the firm shuts down production to minimize loss, which would equal the amount of fixed cost. If total <span>variable cost exceeds total revenue in the long run, the firm will exit the market as a business entity to avoid the loss associated with fixed cost at zero production. By terminating busi

Tags

#tvm

Question

- the present value factor formula (2)

Answer

\(PV =FV_n {1 \over (1+r)^n}\)

status | not learned | measured difficulty | 37% [default] | last interval [days] | |||
---|---|---|---|---|---|---|---|

repetition number in this series | 0 | memorised on | scheduled repetition | ||||

scheduled repetition interval | last repetition or drill |

Tags

#discounted-cashflow-applications

Question

In investment management applications, the internal rate of return is called the **[...]**

Answer

money-weighted rate of return

status | not learned | measured difficulty | 37% [default] | last interval [days] | |||
---|---|---|---|---|---|---|---|

repetition number in this series | 0 | memorised on | scheduled repetition | ||||

scheduled repetition interval | last repetition or drill |

Tags

#balance-sheet-analysis #has-images

Question

How is this ratio called?

Answer

status | not learned | measured difficulty | 37% [default] | last interval [days] | |||
---|---|---|---|---|---|---|---|

repetition number in this series | 0 | memorised on | scheduled repetition | ||||

scheduled repetition interval | last repetition or drill |

ing debt such as accounts payables, accrued expenses, and deferred taxes. This ratio is especially useful in analyzing a company with substantial financing from short-term borrowing. Total Debt Ratio = <span>Financial Leverage Ratio = Financial statement analysis aims to investigate a company's financial condition and operating performance. Using financial ratios helps to examine relationships among indi

Tags

#discounted-cashflow-applications

Question

In investment management applications, the internal rate of return is called the money-weighted rate of return because it accounts for **[...]** and **[...]** of all cash flows into and out of the portfolio

Answer

the timing and amount

status | not learned | measured difficulty | 37% [default] | last interval [days] | |||
---|---|---|---|---|---|---|---|

repetition number in this series | 0 | memorised on | scheduled repetition | ||||

scheduled repetition interval | last repetition or drill |

Question

What tribe and clan are Jarir from?

Answer

Tribe (qabīla): Tamīm

Group (don't know Arabic word, or if it is technical): Yarbūʿ

Clan (ʿashīra): Kulayb

Group (don't know Arabic word, or if it is technical): Yarbūʿ

Clan (ʿashīra): Kulayb

status | not learned | measured difficulty | 37% [default] | last interval [days] | |||
---|---|---|---|---|---|---|---|

repetition number in this series | 0 | memorised on | scheduled repetition | ||||

scheduled repetition interval | last repetition or drill |

status | not read | reprioritisations | ||
---|---|---|---|---|

last reprioritisation on | reading queue position [%] | |||

started reading on | finished reading on |

status | not read | reprioritisations | ||
---|---|---|---|---|

last reprioritisation on | reading queue position [%] | |||

started reading on | finished reading on |

status | not read | reprioritisations | ||
---|---|---|---|---|

last reprioritisation on | reading queue position [%] | |||

started reading on | finished reading on |

status | not read | reprioritisations | ||
---|---|---|---|---|

last reprioritisation on | reading queue position [%] | |||

started reading on | finished reading on |

status | not read | reprioritisations | ||
---|---|---|---|---|

last reprioritisation on | reading queue position [%] | |||

started reading on | finished reading on |

#reading-7-discounted-cashflows-applications

A company should choose those capital investment processes that maximize shareholder wealth.

The **net present value (NPV)** of an investment is the present value of its cash inflows minus the present value of its cash outflows. The **internal rate of return (IRR)** is the discount rate that makes net present value equal to 0.

According to the NPV rule, a company should accept projects where the NPV is positive and reject those in which the NPV is negative. A positive NPV suggests that cash inflows outweigh cash outflows on a present value basis. That is, the positive cash flows are sufficient to repay the initial investment along with the capital costs (opportunity cost) associated with the project. If the company must choose between two, mutually-exclusive projects, the one with the higher NPV should be chosen.

According to the IRR Rule, a company should accept projects where the IRR is greater than the discount rate used (WACC) and reject those in which the IRR is less than the discount rate. An IRR greater than the WACC suggests that the project will more than repay the capital costs (opportunity costs) incurred.

There are three problems associated with IRR as a decision rule.

**Reinvestment**The IRR is intended to provide a single number that represents the rate of return generated by a capital investment. As such, it is an easy number to interpret and understand. However, calculation of the IRR assumes that all project cash flows can be reinvested to earn a rate of return exactly equal to the IRR itself. In other words, a project with an IRR of 6% assumes that all cash flows can be reinvested to earn exactly 6%. If the cash flows are invested at a rate lower than 6%, the realized return will be less than the IRR. If the cash flows are invested at a rate higher than 6%, the realized return will be greater than the IRR.

**Scale**In most cases, NPV and IRR rules provide the same recommendation as to whether to accept or reject a given capital investment project. However, when choosing between two mutually-exclusive projects (ranking), NPV and IRR rules may provide conflicting recommendations. In such cases, the NPV rule's recommendation should take precedence.

One of the situations in which IRR is likely to contradict NPV is when there are two mutually-exclusive projects of greatly differing scale: one that requires a relatively small investment and returns relatively small cash flows, and another that requires a much larger investment and returns much larger cash flows.

**Timing**The other situation in which IRR is likely to contradict NPV is when there are two mutually-exclusive projects whose cash flows are timed very differently: one that receives its largest cash flows early in the project and another that receives its largest cash flows late in the project.

status | not read | reprioritisations | ||
---|---|---|---|---|

last reprioritisation on | reading queue position [%] | |||

started reading on | finished reading on |

Tags

#reading-7-discounted-cashflows-applications

Question

A company should choose those capital investment processes that maximize **[...]** .

Answer

shareholder wealth

status | not learned | measured difficulty | 37% [default] | last interval [days] | |||
---|---|---|---|---|---|---|---|

repetition number in this series | 0 | memorised on | scheduled repetition | ||||

scheduled repetition interval | last repetition or drill |

A company should choose those capital investment processes that maximize shareholder wealth. The net present value (NPV) of an investment is the present value of its cash inflows minus the present value of its cash outflows. The internal rate of return (IRR) is the discou

#reading-7-discounted-cashflows-applications

A positive NPV suggests that cash inflows outweigh cash outflows on a present value basis.

status | not read | reprioritisations | ||
---|---|---|---|---|

last reprioritisation on | reading queue position [%] | |||

started reading on | finished reading on |

The internal rate of return (IRR) is the discount rate that makes net present value equal to 0. According to the NPV rule, a company should accept projects where the NPV is positive and reject those in which the NPV is negative. <span>A positive NPV suggests that cash inflows outweigh cash outflows on a present value basis. That is, the positive cash flows are sufficient to repay the initial investment along with the capital costs (opportunity cost) associated with the project. If the company must choose b

Tags

#reading-7-discounted-cashflows-applications

Question

There are three problems associated with IRR as a decision rule.

Answer

Reinvestment, Scale and Timing

status | not learned | measured difficulty | 37% [default] | last interval [days] | |||
---|---|---|---|---|---|---|---|

repetition number in this series | 0 | memorised on | scheduled repetition | ||||

scheduled repetition interval | last repetition or drill |

ater than the discount rate used (WACC) and reject those in which the IRR is less than the discount rate. An IRR greater than the WACC suggests that the project will more than repay the capital costs (opportunity costs) incurred. <span>There are three problems associated with IRR as a decision rule. Reinvestment The IRR is intended to provide a single number that represents the rate of return generated by a capital investment. As such, it is an easy number

Tags

#reading-7-discounted-cashflows-applications

Question

The IRR assumes that all project cash flows can be reinvested to earn **[...]**

Answer

a rate of return exactly equal to the IRR itself.

status | not learned | measured difficulty | 37% [default] | last interval [days] | |||
---|---|---|---|---|---|---|---|

repetition number in this series | 0 | memorised on | scheduled repetition | ||||

scheduled repetition interval | last repetition or drill |

le. Reinvestment The IRR is intended to provide a single number that represents the rate of return generated by a capital investment. As such, it is an easy number to interpret and understand. However, calculation of <span>the IRR assumes that all project cash flows can be reinvested to earn a rate of return exactly equal to the IRR itself. In other words, a project with an IRR of 6% assumes that all cash flows can be reinvested to earn exactly 6%. If the cash flows are invested at a rate lower than 6%, the realized return

Tags

#reading-7-discounted-cashflows-applications

Question

A project with an IRR of 6% assumes that all cash flows can be reinvested to earn **[...]**

Answer

exactly 6%.

status | not learned | measured difficulty | 37% [default] | last interval [days] | |||
---|---|---|---|---|---|---|---|

repetition number in this series | 0 | memorised on | scheduled repetition | ||||

scheduled repetition interval | last repetition or drill |

y a capital investment. As such, it is an easy number to interpret and understand. However, calculation of the IRR assumes that all project cash flows can be reinvested to earn a rate of return exactly equal to the IRR itself. In other words, <span>a project with an IRR of 6% assumes that all cash flows can be reinvested to earn exactly 6%. If the cash flows are invested at a rate lower than 6%, the realized return will be less than the IRR. If the cash flows are invested at a rate higher than 6%, the realized return will

#reading-7-discounted-cashflows-applications

A project with an IRR of 6% assumes that all cash flows can be reinvested to earn exactly 6%. If the cash flows are invested at a rate lower than 6%, the realized return will be less than the IRR. If the cash flows are invested at a rate higher than 6%, the realized return will be greater than the IRR.

status | not read | reprioritisations | ||
---|---|---|---|---|

last reprioritisation on | reading queue position [%] | |||

started reading on | finished reading on |

y a capital investment. As such, it is an easy number to interpret and understand. However, calculation of the IRR assumes that all project cash flows can be reinvested to earn a rate of return exactly equal to the IRR itself. In other words, <span>a project with an IRR of 6% assumes that all cash flows can be reinvested to earn exactly 6%. If the cash flows are invested at a rate lower than 6%, the realized return will be less than the IRR. If the cash flows are invested at a rate higher than 6%, the realized return will be greater than the IRR. Scale In most cases, NPV and IRR rules provide the same recommendation as to whether to accept or reject a given capital investment project. However, when

Tags

#reading-7-discounted-cashflows-applications

Question

Answer

Since IRR supposes the reinvestment of the funds at the same rate the distance between cashflows can make a substantial difference

status | not learned | measured difficulty | 37% [default] | last interval [days] | |||
---|---|---|---|---|---|---|---|

repetition number in this series | 0 | memorised on | scheduled repetition | ||||

scheduled repetition interval | last repetition or drill |

usive projects of greatly differing scale: one that requires a relatively small investment and returns relatively small cash flows, and another that requires a much larger investment and returns much larger cash flows. <span>Timing The other situation in which IRR is likely to contradict NPV is when there are two mutually-exclusive projects whose cash flows are timed very differently: one that receives its

#has-images #reading-7-discounted-cashflows-applications

When analyzing rates of return, our starting point is the **total return**, or **holding period return (HPR)**. HPR measures the total return for holding an investment over a certain period of time, and can be calculated using the following formula:
*Example*

- P
_{t}= price per share at the end of time period t - P
_{(t-1)}= price per share at the end of time period t-1, the time period immediately preceding time period t - P
_{t}- P_{t-1}= price appreciation of the investment - D
_{t}= cash distributions received during time period t: for common stock, cash distribution is the dividend; for bonds, cash distribution is the coupon payment.

- It has an element of time attached to it: monthly, quarterly or annual returns. HPR can be computed for any time period.
- It has no currency unit attached to it; the result holds regardless of the currency in which prices are denominated.

A stock is currently worth $60. If you purchased the stock exactly one year ago for $50 and received a $2 dividend over the course of the year, what is your holding period return?

R_{t} = ($60 - $50 + $2)/$50 = 0.24 or 24%

The return for time period t is the **capital gain** (or loss) plus distributions divided by the beginning-of-period price (**dividend yield**). Note that for common stocks the distribution is the dividend; for bonds, the distribution is the coupon payment.

The holding period return for any asset can be calculated for any time period (day, week, month, or year) simply by changing the interpretation of the time interval.

Return can be expressed in decimals (0.05), fractions (5/100), or as a percent (5%). These are all equivalent.

status | not read | reprioritisations | ||
---|---|---|---|---|

last reprioritisation on | reading queue position [%] | |||

started reading on | finished reading on |

Tags

#reading-7-discounted-cashflows-applications

Question

When analyzing rates of return, our starting point is the **[...]**

Answer

status | not learned | measured difficulty | 37% [default] | last interval [days] | |||
---|---|---|---|---|---|---|---|

repetition number in this series | 0 | memorised on | scheduled repetition | ||||

scheduled repetition interval | last repetition or drill |

When analyzing rates of return, our starting point is the total return, or holding period return (HPR). HPR measures the total return for holding an investment over a certain period of time, and can be calculated using the following formula:

Tags

#reading-7-discounted-cashflows-applications

Question

Answer

status | not learned | measured difficulty | 37% [default] | last interval [days] | |||
---|---|---|---|---|---|---|---|

repetition number in this series | 0 | memorised on | scheduled repetition | ||||

scheduled repetition interval | last repetition or drill |

When analyzing rates of return, our starting point is the total return, or holding period return (HPR). HPR measures the total return for holding an investment over a certain period of time, and can be calculated using the following formula:

Tags

#reading-7-discounted-cashflows-applications

Question

Answer

HPR

status | not learned | measured difficulty | 37% [default] | last interval [days] | |||
---|---|---|---|---|---|---|---|

repetition number in this series | 0 | memorised on | scheduled repetition | ||||

scheduled repetition interval | last repetition or drill |

When analyzing rates of return, our starting point is the total return, or holding period return (HPR). HPR measures the total return for holding an investment over a certain period of time, and can be calculated using the following formula: P t = price per share at the end of time period t P (t-1) = price per share at the

Tags

#has-images #reading-7-discounted-cashflows-applications

Question

Answer

status | not learned | measured difficulty | 37% [default] | last interval [days] | |||
---|---|---|---|---|---|---|---|

repetition number in this series | 0 | memorised on | scheduled repetition | ||||

scheduled repetition interval | last repetition or drill |

When analyzing rates of return, our starting point is the total return, or holding period return (HPR). HPR measures the total return for holding an investment over a certain period of time, and can be calculated using the following formula: P t = price per share at the end of time period t P (t-1) = price per share at the end of time period t-1, the time period immediately

Tags

#has-images #reading-7-discounted-cashflows-applications

Question

- P
_{t}=**[...]** - P
_{(t-1)}= price per share at the end of time period t-1, the time period immediately preceding time period t - P
_{t}- P_{t-1}=**[...]** - D
_{t}=**[...]**

Answer

price per share at the end of time period t

price appreciation of the investment

cash distributions received during time period t

price appreciation of the investment

cash distributions received during time period t

status | not learned | measured difficulty | 37% [default] | last interval [days] | |||
---|---|---|---|---|---|---|---|

repetition number in this series | 0 | memorised on | scheduled repetition | ||||

scheduled repetition interval | last repetition or drill |

t is the total return, or holding period return (HPR). HPR measures the total return for holding an investment over a certain period of time, and can be calculated using the following formula: <span>P t = price per share at the end of time period t P (t-1) = price per share at the end of time period t-1, the time period immediately preceding time period t P t - P t-1 = price appreciation of the investment D t = cash distributions received during time period t: for common stock, cash distribution is the dividend; for bonds, cash distribution is the coupon payment. It has two important characteristics: It has an element of time attached to it: monthly, quarterly or annual returns. HPR can be computed for any time period. It has n

Tags

#reading-7-discounted-cashflows-applications

Question

In **HPR** for common stock, cash distribution is **[...]** ; for bonds, cash distribution is **[...]**

Answer

the dividend

the coupon payment.

the coupon payment.

status | not learned | measured difficulty | 37% [default] | last interval [days] | |||
---|---|---|---|---|---|---|---|

repetition number in this series | 0 | memorised on | scheduled repetition | ||||

scheduled repetition interval | last repetition or drill |

e end of time period t P (t-1) = price per share at the end of time period t-1, the time period immediately preceding time period t P t - P t-1 = price appreciation of the investment D t = cash distributions received during time period t: <span>for common stock, cash distribution is the dividend; for bonds, cash distribution is the coupon payment. It has two important characteristics: It has an element of time attached to it: monthly, quarterly or annual returns. HPR can be computed for any time period. It has n

Tags

#reading-7-discounted-cashflows-applications

Question

- It has an element of
**[...]** - It has no
**[...]**

Answer

time attached to it.

currency unit attached to it.

currency unit attached to it.

status | not learned | measured difficulty | 37% [default] | last interval [days] | |||
---|---|---|---|---|---|---|---|

repetition number in this series | 0 | memorised on | scheduled repetition | ||||

scheduled repetition interval | last repetition or drill |

eceding time period t P t - P t-1 = price appreciation of the investment D t = cash distributions received during time period t: for common stock, cash distribution is the dividend; for bonds, cash distribution is the coupon payment. <span>It has two important characteristics: It has an element of time attached to it: monthly, quarterly or annual returns. HPR can be computed for any time period. It has no currency unit attached to it; the result holds regardless of the currency in which prices are denominated. Example A stock is currently worth $60. If you purchased the stock exactly one year ago for $50 and received a $2 dividend over the course of the year, what is your ho

Tags

#reading-7-discounted-cashflows-applications

Question

The holding period return for an asset can be calculated for any **[...]**

Answer

time period (day, week, month, or year)

status | not learned | measured difficulty | 37% [default] | last interval [days] | |||
---|---|---|---|---|---|---|---|

repetition number in this series | 0 | memorised on | scheduled repetition | ||||

scheduled repetition interval | last repetition or drill |

period t is the capital gain (or loss) plus distributions divided by the beginning-of-period price (dividend yield). Note that for common stocks the distribution is the dividend; for bonds, the distribution is the coupon payment. <span>The holding period return for any asset can be calculated for any time period (day, week, month, or year) simply by changing the interpretation of the time interval. Return can be expressed in decimals (0.05), fractions (5/100), or as a percent (5%). These are all equivalent. &

Tags

#reading-7-discounted-cashflows-applications

Question

How do you change the time unit in HPR?

Answer

Changing the interpretation of the time interval.

status | not learned | measured difficulty | 37% [default] | last interval [days] | |||
---|---|---|---|---|---|---|---|

repetition number in this series | 0 | memorised on | scheduled repetition | ||||

scheduled repetition interval | last repetition or drill |

d). Note that for common stocks the distribution is the dividend; for bonds, the distribution is the coupon payment. The holding period return for any asset can be calculated for any time period (day, week, month, or year) simply <span>by changing the interpretation of the time interval. Return can be expressed in decimals (0.05), fractions (5/100), or as a percent (5%). These are all equivalent. <span><body><html>

#has-images #reading-7-discounted-cashflows-applications

The **dollar-weighted rate of return** is essentially the internal rate of return (IRR) on a portfolio. This approach considers the *timing* and *amount*of cash flows. It is affected by the timing of cash flows. If funds are added to a portfolio when the portfolio is performing well (poorly), the dollar-weighted rate of return will be inflated (depressed).

The **time-weighted rate of return** measures the compound growth rate of $1 initial investment over the measurement period. *Time-weighted*means that returns are averaged over time. This approach is not affected by the timing of cash flows; therefore, it is the preferred method of performance measurement.

*Example*

Jayson bought a share of IBM stock for $100 on December 31, 2000. On December 31, 2001, he bought another share for $150. On December 31, 2002, he sold both shares for $140 each. The stock paid a dividend of $10 per share at the end of each year.

To calculate the dollar-weighted rate of return, you need to determine the timing and amount of cash flows for each year, and then set the present value of net cash flows to be 0: - 100 - 140/(1 + r) + 300/(1 + r)^{2} = 0. You can use the IRR function on a financial calculator to solve for r to get the dollar-weighted rate of return: r = 17%.

To calculate the time-weighted rate of return:

- Split the overall measurement period into equal sub-periods on the dates of cash flows. For the first year:
- beginning price: $100
- dividends: $10
- ending price: $150

- beginning price: $300 (150 x 2)
- dividends: $20 (10 x 2)
- ending price: $280 (140 x 2)

- Calculate the holding period return (HPR) on the portfolio for each sub-period: HPR = (Dividends + Ending Price)/Beginning Price - 1. For the first year, HPR
_{1}: (150 + 10)/100 - 1 = 0.60. For the second year, HPR_{2}: (280 + 20)/300 - 1 = 0. - Calculate the time-weighted rate of return:
- If the measurement period < 1 year, compound holding period returns to get an annualized rate of return for the year.
- If the measurement period > 1 year, take the geometric mean of the annual returns.

status | not read | reprioritisations | ||
---|---|---|---|---|

last reprioritisation on | reading queue position [%] | |||

started reading on | finished reading on |

Tags

#reading-7-discounted-cashflows-applications

Question

The **dollar-weighted rate of return** is essentially the **[...]** on a portfolio.

Answer

internal rate of return (IRR)

status | not learned | measured difficulty | 37% [default] | last interval [days] | |||
---|---|---|---|---|---|---|---|

repetition number in this series | 0 | memorised on | scheduled repetition | ||||

scheduled repetition interval | last repetition or drill |

The dollar-weighted rate of return is essentially the internal rate of return (IRR) on a portfolio. This approach considers the timing and amountof cash flows. It is affected by the timing of cash flows. If funds are added to a portfolio when the portfolio is performing well (poorly),

#reading-7-discounted-cashflows-applications

In the **dollar-weighted rate of return i**f funds are added to a portfolio when the portfolio is performing well (poorly), the dollar-weighted rate of return will be inflated (depressed).

status | not read | reprioritisations | ||
---|---|---|---|---|

last reprioritisation on | reading queue position [%] | |||

started reading on | finished reading on |

The dollar-weighted rate of return is essentially the internal rate of return (IRR) on a portfolio. This approach considers the timing and amountof cash flows. It is affected by the timing of cash flows. If funds are added to a portfolio when the portfolio is performing well (poorly), the dollar-weighted rate of return will be inflated (depressed). The time-weighted rate of return measures the compound growth rate of $1 initial investment over the measurement period. Time-weightedmeans that returns are averaged over t

Tags

#reading-7-discounted-cashflows-applications

Question

The **time-weighted rate of return** measures the **[...]** of $1 initial investment over the measurement period.

Answer

compound growth rate

status | not learned | measured difficulty | 37% [default] | last interval [days] | |||
---|---|---|---|---|---|---|---|

repetition number in this series | 0 | memorised on | scheduled repetition | ||||

scheduled repetition interval | last repetition or drill |

rs the timing and amountof cash flows. It is affected by the timing of cash flows. If funds are added to a portfolio when the portfolio is performing well (poorly), the dollar-weighted rate of return will be inflated (depressed). <span>The time-weighted rate of return measures the compound growth rate of $1 initial investment over the measurement period. Time-weightedmeans that returns are averaged over time. This approach is not affected by the timing of cash flows; therefore, it is the preferred method of performance measurement.

Tags

#reading-7-discounted-cashflows-applications

Question

Answer

averaged over time.

status | not learned | measured difficulty | 37% [default] | last interval [days] | |||
---|---|---|---|---|---|---|---|

repetition number in this series | 0 | memorised on | scheduled repetition | ||||

scheduled repetition interval | last repetition or drill |

the portfolio is performing well (poorly), the dollar-weighted rate of return will be inflated (depressed). The time-weighted rate of return measures the compound growth rate of $1 initial investment over the measurement period. <span>Time-weightedmeans that returns are averaged over time. This approach is not affected by the timing of cash flows; therefore, it is the preferred method of performance measurement. Example Jayson bought a share of I

Tags

#reading-7-discounted-cashflows-applications

Question

This approach is not affected by the timing of cash flows; therefore, it is the preferred method of performance measurement.

Which aproach are we talking about?

Which aproach are we talking about?

Answer

Time weighted rate of return

status | not learned | measured difficulty | 37% [default] | last interval [days] | |||
---|---|---|---|---|---|---|---|

repetition number in this series | 0 | memorised on | scheduled repetition | ||||

scheduled repetition interval | last repetition or drill |

eighted rate of return will be inflated (depressed). The time-weighted rate of return measures the compound growth rate of $1 initial investment over the measurement period. Time-weightedmeans that returns are averaged over time. <span>This approach is not affected by the timing of cash flows; therefore, it is the preferred method of performance measurement. Example Jayson bought a share of IBM stock for $100 on December 31, 2000. On December 31, 2001, he bought another share for $150. On December 31, 2002, he sold

Tags

#reading-7-discounted-cashflows-applications

Question

When calculating the **Time Weighted rate of return** if the measurement period < 1 year, **[...]** to get an annualized rate of return for the year.

Answer

compound holding period returns

status | not learned | measured difficulty | 37% [default] | last interval [days] | |||
---|---|---|---|---|---|---|---|

repetition number in this series | 0 | memorised on | scheduled repetition | ||||

scheduled repetition interval | last repetition or drill |

sub-period: HPR = (Dividends + Ending Price)/Beginning Price - 1. For the first year, HPR 1 : (150 + 10)/100 - 1 = 0.60. For the second year, HPR 2 : (280 + 20)/300 - 1 = 0. Calculate the time-weighted rate of return: <span>If the measurement period < 1 year, compound holding period returns to get an annualized rate of return for the year. If the measurement period > 1 year, take the geometric mean of the annual returns. <span><body><html>

Tags

#reading-7-discounted-cashflows-applications

Question

When Calculating the **time-weighted rate of return:**
**[...]**

Answer

take the geometric mean of the annual returns.

status | not learned | measured difficulty | 37% [default] | last interval [days] | |||
---|---|---|---|---|---|---|---|

repetition number in this series | 0 | memorised on | scheduled repetition | ||||

scheduled repetition interval | last repetition or drill |

For the second year, HPR 2 : (280 + 20)/300 - 1 = 0. Calculate the time-weighted rate of return: If the measurement period < 1 year, compound holding period returns to get an annualized rate of return for the year. <span>If the measurement period > 1 year, take the geometric mean of the annual returns. <span><body><html>

#has-images #reading-7-discounted-cashflows-applications

Pure discount instruments such as T-bills are quoted differently than U.S. government bonds. They are quoted on a **bank discount basis** rather than on a price basis:

- r
_{BD}= the annualized yield on a bank discount basis - D = the dollar discount, which is equal to the difference between the face value of the bill, F, and its purchase price, P
- t = the number of days remaining to maturity
- 360 = the bank convention of the number of days in a year.

- It is based on the face value, not on the purchase price. Instead, return on investment should be measured based on cost of investment.
- It is annualized using a 360-day year, not a 365-day year.
- It annualizes with simple interest and ignores the effect of interest on interest (compound interest).

- P
_{0}= the initial price of the instrument - P
_{1}= the price received for the instrument at its maturity - D
_{1}= the cash distribution paid by the instrument at its maturity (that is, interest).

Note that HPY is computed on the basis of purchase price, not face value. It is not an annualized yield.

The **effective annual yield** is the annualized HPY on the basis of a 365-day year. It incorporates the effect of compounding interest.

**Money market yield** (also known as **CD equivalent yield**) is the annualized HPY on the basis of a 360-day year using simple interest.

*Example*

An investor buys a $1,000 face-value T-bill due in 60 days at a price of $990.

- Bank discount yield: (1000 - 990)/1000 x 360/60 = 6%
- Holding period yield: (1000 - 990)/990 = 1.0101%
- Effective annual yield: (1 + 1.0101%)
^{365/60}- 1 = 6.3047% - Money market yield: (360 x 6%)/(360 - 60 x 6%) = 6.0606%

- EAY = (1 + HPY)
^{365/t}- 1 - r
_{MM}= HPY x 360/t

- HPY = ( 1 + EAY)
^{t/365}- 1 - r
_{MM}= [(1 + EAY)^{t/365}- 1] x (360/t)

- HPY = r
_{MM}x (t/360) - EAY = (1 + r
_{MM}x t/360)^{365/t}- 1

status | not read | reprioritisations | ||
---|---|---|---|---|

last reprioritisation on | reading queue position [%] | |||

started reading on | finished reading on |

Tags

#reading-7-discounted-cashflows-applications

Question

There are two types of money market instruments: **[...]**, and **[...]**

Answer

interest-bearing instruments (e.g., bank certificates of deposit)

pure discount instruments (e.g., U.S. Treasury bills).

pure discount instruments (e.g., U.S. Treasury bills).

status | not learned | measured difficulty | 37% [default] | last interval [days] | |||
---|---|---|---|---|---|---|---|

repetition number in this series | 0 | memorised on | scheduled repetition | ||||

scheduled repetition interval | last repetition or drill |

Money market instruments are low-risk, highly liquid debt instruments with a maturity of one year or less. There are two types of money market instruments: interest-bearing instruments (e.g., bank certificates of deposit), and pure discount instruments (e.g., U.S. Treasury bills). Pure discount instruments such as T-bills are quoted differently than U.S. government bonds. They are quoted on a bank discount basis rather than on a price basis: &#

Tags

#has-images #reading-7-discounted-cashflows-applications

Question

**Bank discount ** formula

BDY= **[...]**

Answer

status | not learned | measured difficulty | 37% [default] | last interval [days] | |||
---|---|---|---|---|---|---|---|

repetition number in this series | 0 | memorised on | scheduled repetition | ||||

scheduled repetition interval | last repetition or drill |

earing instruments (e.g., bank certificates of deposit), and pure discount instruments (e.g., U.S. Treasury bills). Pure discount instruments such as T-bills are quoted differently than U.S. government bonds. They are quoted on a <span>bank discount basis rather than on a price basis: r BD = the annualized yield on a bank discount basis D = the dollar discount, which is equal to the difference between the face v

Tags

#has-images #reading-7-discounted-cashflows-applications

Question

- r
_{BD}=**[...]** - D =
**[...]** - t =
**[...]** - 360 = the bank convention of the number of days in a year.

Answer

the annualized yield on a bank discount basis

the dollar discount, which is equal to the difference between the face value of the bill, F, and its purchase price, P

the number of days remaining to maturity

the dollar discount, which is equal to the difference between the face value of the bill, F, and its purchase price, P

the number of days remaining to maturity

status | not learned | measured difficulty | 37% [default] | last interval [days] | |||
---|---|---|---|---|---|---|---|

repetition number in this series | 0 | memorised on | scheduled repetition | ||||

scheduled repetition interval | last repetition or drill |

bills). Pure discount instruments such as T-bills are quoted differently than U.S. government bonds. They are quoted on a bank discount basis rather than on a price basis: <span>r BD = the annualized yield on a bank discount basis D = the dollar discount, which is equal to the difference between the face value of the bill, F, and its purchase price, P t = the number of days remaining to maturity 360 = the bank convention of the number of days in a year. Bank discount yield is not a meaningful measure of the return on investment because: It is based on the face value, not on the purchase price. Instead, return on inves

Tags

#reading-7-discounted-cashflows-applications

Question

Bank discount yield is not a meaningful measure of the return on investment because:

- It is based on
**[...]**, not on the**[...]**. - It is annualized using a 360-day year, not a 365-day year.
- It annualizes with simple interest and ignores the effect of interest on interest (compound interest).

Answer

the face value

purchase price

Instead, return on investment should be measured based on cost of investment.

purchase price

Instead, return on investment should be measured based on cost of investment.

status | not learned | measured difficulty | 37% [default] | last interval [days] | |||
---|---|---|---|---|---|---|---|

repetition number in this series | 0 | memorised on | scheduled repetition | ||||

scheduled repetition interval | last repetition or drill |

unt basis D = the dollar discount, which is equal to the difference between the face value of the bill, F, and its purchase price, P t = the number of days remaining to maturity 360 = the bank convention of the number of days in a year. <span>Bank discount yield is not a meaningful measure of the return on investment because: It is based on the face value, not on the purchase price. Instead, return on investment should be measured based on cost of investment. It is annualized using a 360-day year, not a 365-day year. It annualizes with simple interest and ignores the effect of interest on interest (compound interest). Holding period yield (HPY) is the return earned by an investor if the money market instrument is held until maturity: P 0 =

Tags

#reading-7-discounted-cashflows-applications

Question

Bank discount yield is not a meaningful measure of the return on investment because:

- It is based on the face value , not on the purchase price.
- It is
**[...]**. - It annualizes with simple interest and ignores the effect of interest on interest (compound interest).

Answer

annualized using a 360-day year, not a 365-day year

status | not learned | measured difficulty | 37% [default] | last interval [days] | |||
---|---|---|---|---|---|---|---|

repetition number in this series | 0 | memorised on | scheduled repetition | ||||

scheduled repetition interval | last repetition or drill |

unt basis D = the dollar discount, which is equal to the difference between the face value of the bill, F, and its purchase price, P t = the number of days remaining to maturity 360 = the bank convention of the number of days in a year. <span>Bank discount yield is not a meaningful measure of the return on investment because: It is based on the face value, not on the purchase price. Instead, return on investment should be measured based on cost of investment. It is annualized using a 360-day year, not a 365-day year. It annualizes with simple interest and ignores the effect of interest on interest (compound interest). Holding period yield (HPY) is the return earned by an investor if the money market instrument is held until maturity: P 0 =

Tags

#reading-7-discounted-cashflows-applications

Question

Bank discount yield is not a meaningful measure of the return on investment because:

- It is based on the face value , not on the purchase price.
- It is annualized using a 360-day year, not a 365-day year.
- It
**[...]**

Answer

annualizes with simple interest

ignores the effect of interest on interest (compound interest).

ignores the effect of interest on interest (compound interest).

status | not learned | measured difficulty | 37% [default] | last interval [days] | |||
---|---|---|---|---|---|---|---|

repetition number in this series | 0 | memorised on | scheduled repetition | ||||

scheduled repetition interval | last repetition or drill |

unt basis D = the dollar discount, which is equal to the difference between the face value of the bill, F, and its purchase price, P t = the number of days remaining to maturity 360 = the bank convention of the number of days in a year. <span>Bank discount yield is not a meaningful measure of the return on investment because: It is based on the face value, not on the purchase price. Instead, return on investment should be measured based on cost of investment. It is annualized using a 360-day year, not a 365-day year. It annualizes with simple interest and ignores the effect of interest on interest (compound interest). Holding period yield (HPY) is the return earned by an investor if the money market instrument is held until maturity: P 0 =

Tags

#has-images #reading-7-discounted-cashflows-applications

Question

HPY= **[...]**

Answer

status | not learned | measured difficulty | 37% [default] | last interval [days] | |||
---|---|---|---|---|---|---|---|

repetition number in this series | 0 | memorised on | scheduled repetition | ||||

scheduled repetition interval | last repetition or drill |

tead, return on investment should be measured based on cost of investment. It is annualized using a 360-day year, not a 365-day year. It annualizes with simple interest and ignores the effect of interest on interest (compound interest). <span>Holding period yield (HPY) is the return earned by an investor if the money market instrument is held until maturity: P 0 = the initial price of the instrument P 1 = the price received for the instrument at its maturity D 1 = the cash distributio

Tags

#has-images #reading-7-discounted-cashflows-applications

Question

- P
_{0}=**[...]** - P
_{1}=**[...]** - D
_{1}=**[...]**

Answer

the initial price of the instrument

the price received for the instrument at its maturity

the cash distribution paid by the instrument at its maturity.

the price received for the instrument at its maturity

the cash distribution paid by the instrument at its maturity.

status | not learned | measured difficulty | 37% [default] | last interval [days] | |||
---|---|---|---|---|---|---|---|

repetition number in this series | 0 | memorised on | scheduled repetition | ||||

scheduled repetition interval | last repetition or drill |

gnores the effect of interest on interest (compound interest). Holding period yield (HPY) is the return earned by an investor if the money market instrument is held until maturity: <span>P 0 = the initial price of the instrument P 1 = the price received for the instrument at its maturity D 1 = the cash distribution paid by the instrument at its maturity (that is, interest). Since a pure discount instrument (e.g., a T-bill) makes no interest payment, its HPY is (P 1 - P 0 )/P 0 . Note that HPY is computed on the basis of purchase price, n

Tags

#reading-7-discounted-cashflows-applications

Question

In a T-bill HPY is computed on the basis of **[...]**, not **[...]**

Answer

purchase price

face value.

face value.

status | not learned | measured difficulty | 37% [default] | last interval [days] | |||
---|---|---|---|---|---|---|---|

repetition number in this series | 0 | memorised on | scheduled repetition | ||||

scheduled repetition interval | last repetition or drill |

instrument at its maturity D 1 = the cash distribution paid by the instrument at its maturity (that is, interest). Since a pure discount instrument (e.g., a T-bill) makes no interest payment, its HPY is (P 1 - P 0 )/P 0 . <span>Note that HPY is computed on the basis of purchase price, not face value. It is not an annualized yield. The effective annual yield is the annualized HPY on the basis of a 365-day year. It incorporates the effect of compounding interest. &#

Tags

#reading-7-discounted-cashflows-applications

Question

Is the HPR of a T-bill annualized?

Answer

No

status | not learned | measured difficulty | 37% [default] | last interval [days] | |||
---|---|---|---|---|---|---|---|

repetition number in this series | 0 | memorised on | scheduled repetition | ||||

scheduled repetition interval | last repetition or drill |

ument at its maturity (that is, interest). Since a pure discount instrument (e.g., a T-bill) makes no interest payment, its HPY is (P 1 - P 0 )/P 0 . Note that HPY is computed on the basis of purchase price, not face value. <span>It is not an annualized yield. The effective annual yield is the annualized HPY on the basis of a 365-day year. It incorporates the effect of compounding interest.

Tags

#reading-7-discounted-cashflows-applications

Question

With which formula do you annualize the HPY of a T-Bill on a 365 basis

Answer

The **effective annual yield**

status | not learned | measured difficulty | 37% [default] | last interval [days] | |||
---|---|---|---|---|---|---|---|

repetition number in this series | 0 | memorised on | scheduled repetition | ||||

scheduled repetition interval | last repetition or drill |

#13; Since a pure discount instrument (e.g., a T-bill) makes no interest payment, its HPY is (P 1 - P 0 )/P 0 . Note that HPY is computed on the basis of purchase price, not face value. It is not an annualized yield. <span>The effective annual yield is the annualized HPY on the basis of a 365-day year. It incorporates the effect of compounding interest. Money market yield (also known as CD equivalent yield) is the annualized HPY on the basis of

Tags

#has-images #reading-7-discounted-cashflows-applications

Question

The **effective annual yield** formula

Answer

status | not learned | measured difficulty | 37% [default] | last interval [days] | |||
---|---|---|---|---|---|---|---|

repetition number in this series | 0 | memorised on | scheduled repetition | ||||

scheduled repetition interval | last repetition or drill |

#13; Since a pure discount instrument (e.g., a T-bill) makes no interest payment, its HPY is (P 1 - P 0 )/P 0 . Note that HPY is computed on the basis of purchase price, not face value. It is not an annualized yield. <span>The effective annual yield is the annualized HPY on the basis of a 365-day year. It incorporates the effect of compounding interest. Money market yield (also known as CD equivalent yield) is the annualized HPY on the basis of a 360-day year using simple interest.

Tags

#reading-7-discounted-cashflows-applications

Question

Answer

status | not learned | measured difficulty | 37% [default] | last interval [days] | |||
---|---|---|---|---|---|---|---|

repetition number in this series | 0 | memorised on | scheduled repetition | ||||

scheduled repetition interval | last repetition or drill |

se price, not face value. It is not an annualized yield. The effective annual yield is the annualized HPY on the basis of a 365-day year. It incorporates the effect of compounding interest. <span>Money market yield (also known as CD equivalent yield) is the annualized HPY on the basis of a 360-day year using simple interest. Example An investor buys a $1,000 face-value T-bill due

Tags

#reading-7-discounted-cashflows-applications

Question

Answer

status | not learned | measured difficulty | 37% [default] | last interval [days] | |||
---|---|---|---|---|---|---|---|

repetition number in this series | 0 | memorised on | scheduled repetition | ||||

scheduled repetition interval | last repetition or drill |

se price, not face value. It is not an annualized yield. The effective annual yield is the annualized HPY on the basis of a 365-day year. It incorporates the effect of compounding interest. <span>Money market yield (also known as CD equivalent yield) is the annualized HPY on the basis of a 360-day year using simple interest. Example An investor buys a $1,000 face-value T-bill due in 60 days at a price of $990. Bank discount yield: (1000 - 990

Tags

#reading-7-discounted-cashflows-applications

Question

**Money market yield** formula

r_{mm }= **[...]**

Answer

\(r_{mm} = {360*BDY \over 360-(t*BDY)}\)

status | not learned | measured difficulty | 37% [default] | last interval [days] | |||
---|---|---|---|---|---|---|---|

repetition number in this series | 0 | memorised on | scheduled repetition | ||||

scheduled repetition interval | last repetition or drill |

se price, not face value. It is not an annualized yield. The effective annual yield is the annualized HPY on the basis of a 365-day year. It incorporates the effect of compounding interest. <span>Money market yield (also known as CD equivalent yield) is the annualized HPY on the basis of a 360-day year using simple interest. Example An investor buys a $1,000 face-value T-bill due in 60 days at a price of $990. Bank discount yield: (1000 - 990

status | not read | reprioritisations | ||
---|---|---|---|---|

last reprioritisation on | reading queue position [%] | |||

started reading on | finished reading on |

What is a 'Zero-Coupon Bond' <span>A zero-coupon bond, also known as an "accrual bond," is a debt security that doesn't pay interest (a coupon) but is traded at a deep discount, rendering profit at maturity when the bond is redeemed for its full face value. Some zero-coupon bonds are issued as such, while others are bonds that have been stripped of their coupons by a financial institution and then repackaged as zero-coupon bonds. Because t