Chapter 3: Interest and Equivalence
tl;dr money at different times should be valued at different ratios, based on interest rates that compound
↑ F=172,220
1965 |
--------------- 2013
|
↓ P=18
F = P(F|P,i,N), F|P mean F given P
F = 18(1+i)^48
solving for i, we get 21% annual ROR over 50 years, or Return on Revenue
Nominal is the stated interest rate, agnostic of compounding period (sometimes called APR)
- 12% compounded monthly refers to the nominal rate, but is actually Effectively 12.68%
Annuity starts not at payment period 0 but at 1.
- P1 = A(P given A, i, N)
- multiplying (1+i)n is (F/P,i,N)
- multiply by 1/(1+i)^n is (P/F,i,N)
Chapter 4: Equivalence of Repeated Cash Flows
For uniform series over time, to calculate future amount:
For uniform series calculating its present value (considering compounding interest):
Chapter 5: Present Worth Analysis
One way of comparing things is with present worth analysis
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independent alternatives are the cash flows of each alternative not relating
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mutually exclusive alternatives choose only one out of many
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present worth analysis is evaluating mutually exlcusive alternatives at the present time
- net present worth = PW(benefit) - PW(cost)
Chapter 8: Risk
Average, Sqr, Varp, Stdevp, Frequency, Count, Ln
Three risk characteristics of financial assets
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Horizon, how long it takes to get money
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Safety is there guarantee?
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Liquidity how easy it is to sell the asset
Ex-ante is the expected return of an investment
- on a bond, we already know what to expect, so you can simply calculate ex-ante
Ex-post is a measure of past performance
- actual return realized upon sale of the asset
- will be the same as ex-ante if you sell at bond maturity date
Chapter 6: Choosing a discount rate
We used net present value and internal rate of return
- for discounting,
- Weighted average cost of capital (WACC) is the funding cost for many corporate projects
Chapter 15: Minimum Attractive Rate of Return (MARR)
Assumed interested rate was given so far, but in practice we compute different rates or MARR
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closed end mutual funds IPO on stock market and there's a fixed number
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open end mutual funds have an unlimited number of units, but must have a reserve for "redemption"