Exam_2_Review_Sheet

# Exam_2_Review_Sheet - Exam is multiple choice 21 questions....

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Exam is multiple choice 21 questions. Exam score is number correct divided by 20 (x 100 to turn into a percent grade. One question is a bonus question, so the top possible score is 105%. Ch. 6: 5 questions, including 4 problems Ch. 7: 3 questions, including 2 problems Ch. 8: 4 questions, including 3 problems Ch. 9: 3 questions, including 2 problems Ch. 10: 6 questions, including 6 problems Chapter 6: Discounted Cash Flow Valuation: Chapter 5 Time Value of Money o Know how to find PV, FV, N, and I o Semiannual: This means the interest rate is compounded semiannually So when finding PV or FV, the I must be divided by 2 and N will be multiplied by 2. ( N is number of periods, NOT years) Multiple Cash Flows: Know how to calculate (See Chapter 9) Annuities: – finite series of equal payments that occur at regular intervals o If the first payment occurs at the end of the period, it is called an ordinary annuity o If the first payment occurs at the beginning of the period, it is called an annuity due (This is Begin BGN mode) o Most likely, the problem on the exam will be an Ordinary Annuity Problem. However, know hot calculate NPV in BGN mode. Figure out how to convert calculator to BGN mode. o For annuities, the Payment function (or PMT) function is used Perpetuities: cash flows are perpetual, or flow forever o Perpetuity formula: PV = C / r where C = perpetual cash flow and r = rate of return Effective Annual Rate (EAR) and APR o EAR: This is the actual rate paid (or received) after accounting for compounding that occurs during the year o If you want to compare two alternative investments with different compounding periods, you need to compute the EAR and use that for comparison. o EAR = [1 + (APR/m)] m – 1 o APR = annual percentage rate: This is the annual rate that is quoted by law o By definition APR = period rate times the number of periods per year o Things to Remember: You ALWAYS need to make sure that the interest rate and the time period match. If you are looking at annual periods, you need an annual rate. If you are looking at monthly periods, you need a monthly rate. If you have an APR based on monthly compounding, you have to use monthly periods for lump sums, or adjust the interest rate appropriately if you have payments other than monthly Chapter 7: Interest Rates and Bond Valuation: Definitions:

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o Bond- debt security o Par value (face value)- principal amount of a bond that is repaid at the end of the term o Coupon rate- annual coupon divided by the face value of the bond o Coupon payment- the stated interest payment made on a bond o Maturity date- specified date on which the principal amount of a bond is paid o Yield or Yield to maturity- the rate required in the market of a bond Present Value of CFs with Bonds o Bond Value = PV of coupons + PV of par o Bond Value = PV of annuity + PV of lump sum o As interest rates increase, present values decrease o So, as interest rates increase, bond prices decrease and vice versa
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## This note was uploaded on 11/21/2011 for the course BMGT 340 taught by Professor White during the Fall '08 term at Maryland.

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Exam_2_Review_Sheet - Exam is multiple choice 21 questions....

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