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FNCE Cheat Sheet Midterm 1

1) Interest rate risk increases when interest rates rise and coupon rates on existing bonds fall. 2) There are formulas for valuing annuities, perpetuities, and other cash flows under various compounding assumptions including simple, continuous, and other periodic compounding. 3) Bond valuation considers the present value of future coupon payments and face value using discount factors based on the yield to maturity. Strategies can involve combining different bonds to offset future cash flows.

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carmenng1990
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280 views

FNCE Cheat Sheet Midterm 1

1) Interest rate risk increases when interest rates rise and coupon rates on existing bonds fall. 2) There are formulas for valuing annuities, perpetuities, and other cash flows under various compounding assumptions including simple, continuous, and other periodic compounding. 3) Bond valuation considers the present value of future coupon payments and face value using discount factors based on the yield to maturity. Strategies can involve combining different bonds to offset future cash flows.

Uploaded by

carmenng1990
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Interest rate risk= up when years up, coupon rate down

Simple annuity: PV=C((1/r)-(1/r(1+r)^t)


Continuous compounding: rannual=ln(1+rcontinuous)
Annual yield =((1+ R/# periods per year)
# of periods year
) - 1
Non-annual payment amount:(1+R)
#payments peryear
= (1+r)
Solve for R, then simple annuity using R, solve for C
Payoff remainder of loan= PV of remaining payments
Valuing Share with non-annual dividend payment: Find PV of
each payment, Po= PV(1+r)
time units remaining in year
+ PV(1+r)
time units

Discount Factor= 1/ (1+rt)
t
, use to solve for annual yield


Strategy=Buy underpriced bond Z, offset future flows with other bonds W, X and Y
Annunity PV= C((1/r)-(1/r(1+r)
t
))
Growing Annuity=C(1/(r-g) (1+g)
t
/(r-g)(1+r)
t
)
Growing annuity when r=g = (C)(T)/(1+r)
Constant Perpetuity PV = C/r
Growing Perp PV=C/(r-g)
Delayed Perp PV= C/ r(1+r)
t















































Continuous annuity: 1) Solve for continuous perpetuity,
2)discount PV for # years in time frame, use annual r, 1-2=value
of continuous annuity. 1+r=e
r annual, continuous
Valuing share: 1)Stream of annual end year
payments=perpetuity. Find PV. 2)Stream of mid year payments.
PV=(PV end year)(1+rannual, # pay periods in year)
Gordon growth model: Po=Div1/(r-g) when g constant


Future value= C(1+r/#periods per
year)
#periods to maturity

FV=C(1+R)
#periods to maturity
FV=C (PV simple annuity)(discount factor)

NPV=C0 + C1/(1+r1)= C0 + Ct / (1+ rt)
t

Po/EPS1= 1/r + NPVGO/EPS1
NPV=(INVt(ROE-r))/r
G= (k)(ROE)
INV=(EPSt)(k)
DIVt=EPSt(1-k)















































Divt= EPSt(1-k) g=(k)(ROE) Po=EPS1/r + NPVGO
NPVt= INVt(ROE-r) / r DIVt=EPSt - INVt
Expected Return= r = DIV1/Po + g
Annual yield=ra,1 (1+ra,1)=(1+ra,m/m)
m
= (1+R)
m

rannual rate, compunded annually=rannual rate, compound other=rnon-annual
Bond Price=C/(1+r1) + C/(1+r2)
2
+ FV/(1+r2)
2
Yield to maturity: Price=C(1/(1+r) + 1/(1+r)
2
) + FV/(1+r)
2
Yield to Maturity: Price=(Face value)(DFt) where
Price=(DFt)(Face value), DFt= 1/(1+r)
t

*Solving for r as one value, instead of using different rs*
Bond Price=(C)(DF1)+C(DF2)+FV(DF2)
Discount Factor=1/(1+rt)
t

Future rate (f): (1+r1)(1+f2,1)=(1+r3)
3
(1+fi,t)=((1+ri,t)
t+i
/ (1+rt)
t
)
1/i

*where i=# of years term lasts, t=#years in future*
Low Price to earnings ratio=valuehigh=growth
k=1-(Div1/EPS1)
EPSt= EPSt-c(1+gEPSt)
C

R= ra,m / m ra, continuous= ln (1+r)
(1+r)=(1+ra,m/m)
m
= (1+R)
m

To solve for continuous flow of C, PV=C/ra, continuous
Solve for quarterly payments for flow C, PV=Cquarter/R
Ra,continuous=ln(1+ra,1) e
r a, continuous
=(1+ra,1)
PV of stream continuously compounded for t years=
Cannual(1/ra,continuous 1/(ra,cont.)(1+r)
t
)
Effective annual rate=(1+r/m)
m
1 when r=annual %

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