𝐹𝑉

CH.5-TVM: Discounting: 𝑃𝑉 = (1+𝑘 )𝑛

Compounding: 𝐹𝑉 = 𝑃𝑉(1 + 𝑘)𝑛 Continuous compounding: 𝐹𝑉 = 𝑃𝑉 ∙ 𝑒 𝑄𝑅∙𝑡
𝑚 𝑄𝑅 𝑚
Δ k n PV FV PMT Rates: 𝐸𝐹𝐹 = (1 +
𝑄𝑅 𝑓
) −1 𝐸𝐹𝐹 = 𝑒 𝑓 − 1 Effective-Effective: 𝐸(𝑥 )𝑅 = (1 + 𝐸(𝑦)𝑅) 𝑓 − 1
𝑚
k ↑ - ↓ ↑ ↑
QR-QR: ex. 10% QR(SA)= what QR(M)?
n ↑ - ↓ ↑ ↓ 0.1 2

PV ↑ - - ↑ ↑ 1)Find ESR : = 0.05 2)Find EMR : 𝐸𝑀𝑅 = (1 + 0.05)12 − 1 = 0.0081648

2
𝑚 12
FV ↑ - - ↑ ↑ 𝑄𝑅 𝑓 𝑄𝑅 12
3)Find QR(M):𝐸𝑀𝑅 = (1 + ) 0.0081648 = (1 + ) − 1 → 𝑄𝑅 = 0.09798 = 9.8%
PMT ↑ - - ↑ ↑ 𝑚 12

Annuities: constant pmts, constant k, equal t between pmts, finite # pmts Annuity DUE: beg. of period pmts, adds 1 n

𝑃𝑀𝑇1 𝑃𝑀𝑇1
Growing Ann.: k≠g → k=g → 𝑃𝑉0 = ∙𝑛 k>g → 𝑃𝑉0 = 𝐹𝑉 = 𝑃𝑉0 (1 + 𝑘) 𝑛
1+𝑘 𝑘−𝑔

𝑃𝑀𝑇 𝑃𝑀𝑇 𝑃𝑀𝑇1

Perpetuities: same as ann + infinite # pmts, no FV 𝑃𝑉 = Perp. DUE: 𝑃𝑉 = (1 + 𝑘) Growing perp.: k must be > g 𝑃𝑉 =
𝑘 𝑘 𝑘−𝑔
Instalment: = per. Pmts, int+principal, int. portion ↓ with each pmt Mortgage: compounded SA, monthly pmts
To find how much left after x # pmts: 2 nd PV, P1=x enter ↓, P2=x enter ↓, int=answer x=# pmts (ex. how much left after 5 years → x=60)

CH.6-Bonds: loan from investor to cie, corporate debt., when market rates ↑ bonds ↓, FV usually 1000, FV (+) PMT (+) PV (-)
Coupon rate: % of interest investor will receive each year, never Δ YTM: annual return (k) if held to maturity, market rate, fluctuates over time

Quoted price: PV of bond w/o accrued interest

Cash price: actual amt buyer will pay for bond (dirty price), with acc. Int.

Jan 1-June 30=181 Jul 1-Dec 31=184

Ex: 5 years ago a company issued 20-year
Int. rate risk: long maturity, low coupon rate, low YTM, premium more sensitive than discount bonds with a FV of $1000. Today those bonds
When int rates ↓, bond prices ↑, best to have bond less sensitive to min capital losses (vice versa) are trading for $1100 and the CR is 7%.
Nominal return: rate of return earned during hold period based on the in&outflows in nominal terms. What is the I/Y of these bonds?
𝐶 𝑎𝑛𝑛𝑢𝑎𝑙 𝑐𝑜𝑢𝑝𝑜𝑛 1. N=15x2=30
Real return: nominal return adjusted for inflation. 𝐶𝑌 = = 2. FV=1000 4. PMT= (7%x1000) ÷2=35
𝑃𝑟𝑖𝑐𝑒 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑝𝑟𝑖𝑐𝑒
3. PV=-1100 5. CPT I/Y x 2= 5.98%
Current yield: 1-year exp. return on a bond purchased today (always bet CR & YTM)

CH.7-Equity: PS: constant div, do not benefit from growth in market CS: div can fluctuate in value, div determined by BOD,
Declaration: cie value of cie, no voting rights, priority over CS (but debt benefit from growth, have voting rights, last in line for div
announces div first), perpetuity (residual claimants)
Record: date on
which must
own share
Ex-div: must buy share b4 this, 2 business days b4 record Pmt: div pmt **price of bond decreases by the amt of div on ex-div date
Required rate of return: 𝑘 = 𝑅𝐹 + 𝑅𝑖𝑠𝑘 𝑃𝑟𝑒𝑚𝑖𝑢𝑚
𝑔 = 𝑟𝑒𝑡𝑒𝑛𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑖𝑜 × 𝑅𝑂𝐸
𝑟𝑒𝑡𝑒𝑛𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑖𝑜 = 1 − 𝑝𝑎𝑦𝑜𝑢𝑡 𝑟𝑎𝑡𝑖𝑜
𝑅𝑂𝐸 = 𝑝𝑟𝑜𝑓𝑖𝑡 𝑚𝑎𝑟𝑔𝑖𝑛 × 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 × 𝑙𝑒𝑣𝑒𝑟𝑎𝑔𝑒

g=capital gains yield

𝐶𝐹1 𝑃1 −𝑃0
CH.8-Risk, return, portfolio: Income yield: return earned on the inc. portion of the investment = Capital gain(loss) yield =
𝑃0 𝑃0
𝑻𝒐𝒕𝒂𝒍 𝒓𝒆𝒕𝒖𝒓𝒏 = 𝐼𝑛𝑐𝑜𝑚𝑒 𝑦𝑖𝑒𝑙𝑑 + 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑔𝑎𝑖𝑛 𝑦𝑖𝑒𝑙𝑑

Exp. Return:

Ex-ante std. dev:

ρ=1 ρ=-1 ρ=0

**w is related to amt of $

CH.9-CAPM Implications • CML=highest attainable ER for
• A pricing model that uses market risk to relate ER to risk Optimal is tangent to the any risk level, only eff Ps
• If we keep the correlation constant & gradually change eff front. → tangency Slope=sharpe ratio=ERM – RF
w from 1 to 0, std dev will follow a bowl shape portfolio T σM
• MVP=min variance port. In EQ, PM=PT if everyone • CML based on ER → ex ante
• Insurance premium=$ to get out of a risky situation holds the same P • market price of risk=add ER for
• 𝑬𝑹𝑷 = 𝑹𝑭 + 𝒘𝑨 (𝑬𝑹𝑨 − 𝑹𝑭) = 𝒌𝑷 Assumptions increased risk
• 𝜷𝒊 = 𝒊,𝑴
𝝈 𝝆 𝝈
= 𝒊,𝑴 𝒊
• 𝝈 𝟐𝑴 𝝈𝑴
-Identical exp. abt ER & risk • 𝜷𝑴 = 𝟏
• 𝝈𝒑 = 𝒘𝑨 𝝈𝑨 increases in direct proportion to the amt -One-period -No trans costs • RF same for A & B
invested in the risky asset -Borrow/lend at RF rate
• 𝝈𝟐 𝒊 = 𝜷𝟐 𝒊 𝝈𝟐 𝑴 + 𝝈𝟐 𝜺,𝒊 sys. Idiosyncratic -No pers income txs, indiff bet. cap gain/div
• -Many investors → price takers
Cap markets in equilibrium

• Capital gain/loss from holding shares

CH12-Options
• Profit/loss from buying & selling
Call payoff
options (option premiums)
• Payoff from the options
Put payoff • Note how many shares and price you
bought at
• Note you sell all shares at end (price S)

CH13-Capital Budgeting

• K<crossover → choose lowest IRR

• K>crossover → choose highest IRR
(k must be lower)
• K=crossover → indiff, but not both

CF0 + PV of perpetuity = NPV

*If NPV=0 →IRR=k *IRR=rate that makes PI=1 & NPV=0

*If k<IRR →NPV & IRR methods will always result in the same
CH14-Cost of Capital accept/reject decisions.

*tax on cost reduces tax amt

=net incremental after-tax CFs What amount should be used as the annual sales
figure when evaluating the addition of boots to
the product line? *boots - diff between with & w/o

Suppose a firm has 3 billion

shares outstanding and just
reported a net income of $1.5
billion. The firm expects to
maintain a dividend payout ratio
of 40 percent on its earnings. If
the firm’s price-earnings ratio is
20, its leverage ratio is 4 and its
return on equity is 7 percent,
what is its required rate of
return on equity