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Flashcard 1434939952396

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 [...]
Answer
substitution

substitution

income reduction

income effect.

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Substitution effect and income effect
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







Flashcard 1451360390412

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

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Open it
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







Flashcard 1622018231564

Tags
#tvm
Question
the present value factor formula (2)
Answer
\(PV =FV_n {1 \over (1+r)^n}\)

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Flashcard 1623805005068

Tags
#discounted-cashflow-applications
Question
In investment management applications, the internal rate of return is called the [...]
Answer
money-weighted rate of return

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Flashcard 1626081463564

Tags
#balance-sheet-analysis #has-images
Question
How is this ratio called?

Answer
Financial Leverage Ratio

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Subject 5. Uses and Analysis of the Balance Sheet
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







Flashcard 1626085395724

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

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Flashcard 1626110823692

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

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The cover letter is much more important than many authors realize. This letter usually is your first contact with the editor, and the editor will make some important decisions about your paper based on the contents and professionalism of your cover letter. Note: The cover letter is the only section of the manuscript that is single- spaced.
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The purpose of the cover letter is to explain ? politely ? what you are submitting and why. State the title and length of your manuscript and indicate the number of tables and figures. Explain why you decided to submit your manuscript to that particular journal. Why would your paper be of interest to the readers of that journal? What are the strengths of your paper? Explain which section of the target journal would be most appropriate for your manuscript (e.g., Original Articles, Brief Communications, or Reviews). In the salutation of the cover letter, make sure that you use the current editor?s name ? and spell it correctly. Avoid writing ?Dear Editor.? Avoid using the name of the editor of the journal that you submitted to on your first try.
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Help the editors appreciate the significance of your work. Explain what is already known about this area and the advances presented in your paper. Summarize what is new and why the editor should care. The important question that is answered in this paper is X and that is important because of Y. Describe any related papers that you have submitted or will submit soon. Help the editor identify appropriate reviewers, especially for papers that use unusual methodologies or have a limited number of qualified experts.
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Medieval history, then, as recorded at the time, appears for the most part confined to events affecting no more than one of the three great power blocs.
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ut while medieval history portrays the protagonists' conflict over funda mentals, those fundamentals stand revealed as largely identical as soon as the sameness of problems, principles, methods, and aims is envisaged rather than the disparity of the individual solution, procedure, and style of argument or action.
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Subject 1. NPV and IRR
#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.

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Flashcard 1626630917388

Tags
#reading-7-discounted-cashflows-applications
Question
A company should choose those capital investment processes that maximize [...] .

Answer
shareholder wealth

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Subject 1. NPV and IRR
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.
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Subject 1. NPV and IRR
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




Flashcard 1626634849548

Tags
#reading-7-discounted-cashflows-applications
Question
There are three problems associated with IRR as a decision rule.
Answer
Reinvestment, Scale and Timing

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Subject 1. NPV and IRR
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







Flashcard 1626637208844

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.

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Subject 1. NPV and IRR
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







Flashcard 1626639568140

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%.

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Subject 1. NPV and IRR
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.
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Subject 1. NPV and IRR
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




Flashcard 1626644286732

Tags
#reading-7-discounted-cashflows-applications
Question
Why is Timing of cashflows an issue with IRR?

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

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Subject 1. NPV and IRR
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







Subject 2. Holding Period Return
#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:

  • Pt = 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
  • Pt - Pt-1 = price appreciation of the investment
  • Dt = 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 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 holding period return?

Rt = ($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.

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Flashcard 1626650053900

Tags
#reading-7-discounted-cashflows-applications
Question
When analyzing rates of return, our starting point is the [...]
Answer
holding period return (HPR).

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Subject 2. Holding Period Return
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:







Flashcard 1626652413196

Tags
#reading-7-discounted-cashflows-applications
Question
Holding period return (HPR) is also called...
Answer
total return, or

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Subject 2. Holding Period Return
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:







Flashcard 1626654772492

Tags
#reading-7-discounted-cashflows-applications
Question
[...] measures the total return for holding an investment over a certain period of time
Answer
HPR

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Subject 2. Holding Period Return
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







Flashcard 1626657131788

Tags
#has-images #reading-7-discounted-cashflows-applications
Question
Holding period return formula

Answer

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Subject 2. Holding Period Return
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







Flashcard 1626659491084

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

  • Pt = [...]
  • P(t-1) = price per share at the end of time period t-1, the time period immediately preceding time period t
  • Pt - Pt-1 = [...]
  • Dt = [...]
Answer
price per share at the end of time period t

price appreciation of the investment

cash distributions received during time period t

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Subject 2. Holding Period Return
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







Flashcard 1626663423244

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.

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Subject 2. Holding Period Return
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







Flashcard 1626666044684

Tags
#reading-7-discounted-cashflows-applications
Question
HPR has two important characteristics:
  • It has an element of [...]
  • It has no [...]
Answer
time attached to it.

currency unit attached to it.

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Subject 2. Holding Period Return
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







Flashcard 1626668403980

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)

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Subject 2. Holding Period Return
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. &







Flashcard 1626670763276

Tags
#reading-7-discounted-cashflows-applications
Question
How do you change the time unit in HPR?
Answer
Changing the interpretation of the time interval.

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Subject 2. Holding Period Return
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>







Subject 3. Dollar-weighted and Time-weighted Rates of Return
#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 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 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
    For the second year:
    • 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, HPR1: (150 + 10)/100 - 1 = 0.60. For the second year, HPR2: (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.

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Flashcard 1631884021004

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)

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Subject 3. Dollar-weighted and Time-weighted Rates of Return
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 if funds are added to a portfolio when the portfolio is performing well (poorly), the dollar-weighted rate of return will be inflated (depressed).
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Subject 3. Dollar-weighted and Time-weighted Rates of Return
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




Flashcard 1631928585484

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

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Subject 3. Dollar-weighted and Time-weighted Rates of Return
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. &#13







Flashcard 1631942741260

Tags
#reading-7-discounted-cashflows-applications
Question
Time-weighted means that returns are [...]
Answer
averaged over time.

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Subject 3. Dollar-weighted and Time-weighted Rates of Return
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







Flashcard 1631958732044

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#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?
Answer
Time weighted rate of return

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Subject 3. Dollar-weighted and Time-weighted Rates of Return
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







Flashcard 1632002510092

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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

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Subject 3. Dollar-weighted and Time-weighted Rates of Return
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>







Flashcard 1632046812428

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Question
When Calculating the time-weighted rate of return:
    If the measurement period > 1 year, [...]

    Answer
    take the geometric mean of the annual returns.

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    Subject 3. Dollar-weighted and Time-weighted Rates of Return
    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>







    Subject 4. Different Yield Measures of a U.S. Treasury Bill
    #has-images #reading-7-discounted-cashflows-applications

    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:

    • rBD = 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 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:

    • P0 = the initial price of the instrument
    • P1 = the price received for the instrument at its maturity
    • D1 = 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 (P1 - P0)/P0.

    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%
    If we know HPY, then:
    • EAY = (1 + HPY)365/t - 1
    • rMM = HPY x 360/t
    If we know EAY, then:
    • HPY = ( 1 + EAY)t/365 - 1
    • rMM = [(1 + EAY)t/365 - 1] x (360/t)
    If we know rMM, then:
    • HPY = rMM x (t/360)
    • EAY = (1 + rMM x t/360)365/t - 1
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    Flashcard 1632708201740

    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).

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    Subject 4. Different Yield Measures of a U.S. Treasury Bill
    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: &#







    Flashcard 1632768494860

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

    Bank discount formula

    BDY= [...]

    Answer

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    Subject 4. Different Yield Measures of a U.S. Treasury Bill
    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







    Flashcard 1632800214284

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

    • rBD = [...]
    • 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

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    Subject 4. Different Yield Measures of a U.S. Treasury Bill
    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







    Flashcard 1632835865868

    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.

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    Subject 4. Different Yield Measures of a U.S. Treasury Bill
    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 =







    Flashcard 1632864439564

    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



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    Subject 4. Different Yield Measures of a U.S. Treasury Bill
    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 =







    Flashcard 1632883051788

    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).

    statusnot learnedmeasured difficulty37% [default]last interval [days]               
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    Subject 4. Different Yield Measures of a U.S. Treasury Bill
    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 =







    Flashcard 1632905858316

    Tags
    #has-images #reading-7-discounted-cashflows-applications
    Question
    Holding period yield (HPY) formula:

    HPY= [...]

    Answer

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    Subject 4. Different Yield Measures of a U.S. Treasury Bill
    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







    Flashcard 1632930237708

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

    • P0 = [...]
    • P1 = [...]
    • D1 = [...]
    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.

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    Subject 4. Different Yield Measures of a U.S. Treasury Bill
    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







    Flashcard 1633124486412

    Tags
    #reading-7-discounted-cashflows-applications
    Question
    In a T-bill HPY is computed on the basis of [...], not [...]
    Answer
    purchase price

    face value.

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    Subject 4. Different Yield Measures of a U.S. Treasury Bill
    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. &#







    Flashcard 1633167740172

    Tags
    #reading-7-discounted-cashflows-applications
    Question
    Is the HPR of a T-bill annualized?
    Answer
    No

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    Subject 4. Different Yield Measures of a U.S. Treasury Bill
    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.







    Flashcard 1633194216716

    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

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    Subject 4. Different Yield Measures of a U.S. Treasury Bill
    #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







    Flashcard 1633214401804

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

    The effective annual yield formula

    Answer


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    Subject 4. Different Yield Measures of a U.S. Treasury Bill
    #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.







    Flashcard 1633232489740

    Tags
    #reading-7-discounted-cashflows-applications
    Question
    Money market yield is also known as [...]
    Answer
    CD equivalent yield

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    Subject 4. Different Yield Measures of a U.S. Treasury Bill
    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







    Flashcard 1633252412684

    Tags
    #reading-7-discounted-cashflows-applications
    Question
    [...] is the annualized HPY on the basis of a 360-day year using simple interest.
    Answer
    Money market yield

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    Subject 4. Different Yield Measures of a U.S. Treasury Bill
    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







    Flashcard 1633271549196

    Tags
    #reading-7-discounted-cashflows-applications
    Question

    Money market yield formula

    rmm = [...]

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

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    Subject 4. Different Yield Measures of a U.S. Treasury Bill
    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







    A zero-coupon 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.
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    Zero-Coupon Bond
    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