2_Quantitative Methods

# 2_Quantitative Methods - Time Value of Money Interest Rate...

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Time Value of Money - Interest Rate = Real Risk Free Interest Rate + Inflation Premium + Default Risk Premium + Liquidity Premium + Maturity Premium - Continuous Compounding: FV = PVe rn - Effective Interest Rate = (1+Periodic Interest Rate) m – 1; e r – 1 (for continuous compounding) DCF Applications - Discount Rates must be compatible with time periods. - Problems with IRR Rule o Size or Scale of Projects Differ o Timing of cash flows differ - Portfolio Return Measurement o Holding Period Return = (P 1 -P 0 +D 1 )/P 0 o Money Weighted Rate of Return (same as IRR). This is sensitive to the timing and amount of cash flows . o Time Weighted Rate of Return (measures the compound rate of growth) First measure the HPR (all r) and then… R TW =[(1+r 1 )x…x(1+r n )] 1/N – 1. 1/N might not be required, if you are determining an annual yield after combining 4 quarter yields. - Money Market Yields o 360 BD D r Ft = ; D=Dollar Discount (P-F); F= Face Value; t=days remaining o Holding Period Yield = (P 1 -P 0 +D 1 )/P 0 o EAY (Effective Annual Yield) = (1+HPY) 365/t – 1 o R MM =360r BD /(360-tr BD ); R MM = r BD F/P 0 ; R MM = HPY 360/t Statistical Concepts - Descriptive Statistics: Study of how data can be summarized effectively to describe the important aspects of large data sets. - Statistical Inference: Making forecasts, estimates or judgments about a larger group from a smaller group actually observed. - Measurement Scales o Nominal: Weakest level of measurement; categorize but no ranking. o Ordinal: Sort and order data. o Interval: Ranking and assures that difference between scale values are equal. Cannot form ratios. o

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2_Quantitative Methods - Time Value of Money Interest Rate...

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