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FIN504_PowerPoint_Slides_05

# FIN504_PowerPoint_Slides_05 - FIN 504 Financial Management...

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FIN 504: Financial Management Lecture 5: Rate Calculations

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2 FIN 504: Financial Management Rate Calculations Percentages What is a Rate of Change Problem? A Cacophony of Names Types of Rate Calculations Rate Conversions Averaging Rates Real versus Nominal Values
Percentages

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4 FIN 504: Financial Management Percentages Using Absolute (Dollar) Value versus Ratios (e.g., Percentages) Numerical Representation of Percentages Integer Form (5%) Decimal Form (0.05) Calculations Using the Different Forms If in doubt, use the decimal form!
5 FIN 504: Financial Management Percentages Calculating a Percentage If you have 35 balls and 12 are red, what is the percentage of red balls? Basis Points A ‘basis point’ is 1/100 of a percentage 1% = 100 basis points 0.25% = 25 basis points 12 0.343 34.3% 35 = =

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What is a Rate of Change Problem?
7 FIN 504: Financial Management What is a Rate of Change Problem? In all areas of business we often need to make a relative comparison between two items: size of marketing budget, output, work force, etc. When we are comparing items at the same time (non-temporal), we normally use percentages, e.g., the output of one plant is 25% larger than another.

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8 FIN 504: Financial Management What is a Rate of Change Problem? This is more complicated when we are comparing items across time, since we may need to track items over many time periods. These temporal changes are common and will be the focus of our attention.
9 FIN 504: Financial Management Types of Rate of Change Problem Four types of change are central: Returns : Change of Value over Time Interest Rates : Change of Returns over Time Growth Rates : Change of Size over Time Inflation : Change of Prices over Time

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A Cacophony of Names
11 FIN 504: Financial Management A Cacophony of Names Unfortunately, such changes go by a variety of appropriate and inappropriate names: ► Rate ► Return ► Yield ► Rate of Return ► Cost of Capital ► Required Rate of Return ► Expected Return ► Abnormal Return ► Absolute Return ► Relative Return ► Spread ► Hurdle Rate ► Return on… ► Nominal/Real Return ► Yield to Maturity (YTM) ► Plus more than I could list! ► Discount Rate

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12 FIN 504: Financial Management A Cacophony of Names Sometimes the calculations are purely conventional, because they are archaic and economically unsound, e.g., Bond Equivalent Yield (BEY) Bank Discount Basis
Types of Rate Calculations

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14 FIN 504: Financial Management Types of Rate Calculations We will study the following types of rates: Simple Rates (Interest) Compound Rates (Interest) Holding Period Return (HPR) Annual Rates Non-Annual Rates Continuous Time Rates
15 FIN 504: Financial Management Simple Rates (Interest) Simple Rates (Interest) Simple interest is when you receive a return on your principal, but no returns on the accumulated interest. If you put \$100 in an account for three

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FIN504_PowerPoint_Slides_05 - FIN 504 Financial Management...

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