Investments04

Investments04 - Return Measures Professor Pierre-Olivier...

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1 Professor Pierre-Olivier Weill Return Measures 2 Last time ± From PV to FV and vice versa ± PV of zero-coupon bond ¾ It is also the price ¾ Proof: arbitrage! ± Pricing coupon bond ¾ As a package of zero coupon bonds ± Annuity and perpetuity ± Bond prices decrease with interest rate 3 Today ± Compounding, Effective Annual Rate (EAR) ± Quoted rate = Annual Percentage Rate (APR) ± Holding Period Return (HPR) and annualized Holding Period Return – Arithmetic versus Geometric average – Internal Rate of Return (IRR)
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4 Quoted Rate and EAR 5 Quoted Rate and EAR After Daily 10% Quarterly 10% Semi- annually 10% Annually 10% EAR You owe Periodic Rate Com- pounded Quoted Rate 6 Quoted Rates and EAR ± Example: – Interest rate quoted at 10% compounded semi- annually ± Example: Which loan is cheapest: – 10%, compounded semi-annually – 10%, compounded quarterly – 10%, compounded daily ± Effective Annual Rate EAR if interest is compounded m times a year: EAR = (1+ quoted rate / m ) m -1
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This note was uploaded on 02/04/2010 for the course ECON 106v taught by Professor Miyakawa during the Spring '08 term at UCLA.

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Investments04 - Return Measures Professor Pierre-Olivier...

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