FM-1 Formula Sheet:

 Accrued interest = Next coupon amount * (Days between last coupon date and transaction
date / Number of days between two coupon payments)
 Clean Price(also called Quoted Price)= Dirty Price(Also called Invoice Price)-Accrued Interest
 Time Value of Money
m×T
r
o
( )
FV =PV × 1+
m
m×T
r
PV =FV / (1+ )
o m
o For continuous compounding: F V =P V ∗e rT
where

FV = future value

PV = present value

r = rate of interest per annum

T= number of years

m = compounding frequency. If semi-annual, take m=2

 Rule of 72: Approximate time to double investment=72/r, where r is the interest rate in %
 Perpetuity
C
PV =
r
Where C is the constant cash flow that lasts forever and r is the rate of interest
 Growing Perpetuity(a growing stream of cash flows that lasts forever)
C
PV =
r−g
Where, C is the first cash flow
r is the interest rate
g is the rate at which C grows
 Annuity(a constant stream of cash flows with fixed maturity)
C 1
PV =
r
1−
[(1+r )T ]
Where, C is the constant cash flow
r is the interest rate
T is the number of time periods
 Growing Annuity
T
C 1+g
PV =
r−g
1−
(1+r) [ ( )]
Where, C is the first cash flow
r is the interest rate
T is the number of time periods
g is the rate at which C grows
 Valuation of a Bond
N
C /f Face Value
P=( ∑ j
)+
j =1 (1+ y /f ) ( 1+ y / f ) N
N= no. of coupons
P = price today
C= annual coupon
y = yield
f = number of coupons per year. Semi-annual coupon means f=2
 Effective annual rate (EAR) = (1 + R/m)m – 1
Where R is the annual interest rate
m is the compounding frequency or number of coupons per year
 Valuation of a stock
¿
o Zero Growth: P=
R
o Constant Growth:
Div 1
P0 =
R−g
Where, Div is the Dividend paid by the stock
R= Discount Rate
g= Rate of growth of dividend
o Also, g=Retention ratio*Return on retained earnings
Price per share
 P/E ratio=
Earnings per share
o Forward P/E= P0 / E1
o Trailing P/E= P0 / E0