Spotlight Quiz on Inflation, IndexLinking and Compounding


 Roberta Francis
 3 years ago
 Views:
Transcription
1 Spotlight Quiz on Inflation, IndexLinking and Compounding Frequency of payment A major UK bank has recently written to its customers along the following lines: Through talking to customers we have found that the majority would prefer to receive their bank charges monthly rather than quarterly. Therefore we have redesigned our systems to move to monthly billing. Please be assured that we are only changing when we bill you, not what you pay. This change should make it easier to keep a close eye on your account. Question 1 The average amount of your bank charges is 1200 per year, spread evenly over each of 12 months, and your bank currently charges 0.5% interest per month. What is the effect of this change? (a) A welcome helping hand from your bank (b) A price reduction of 0.5% per annum (c) A price increase of 0.5% per annum (d) A price increase of 1.0% per annum (e) A price increase of 1.5% per annum (f) Don t know The right answer is (c) a price increase of 0.5% per annum Previously the cash flows involved in paying the charges would have been 300 per quarter. If rates are 0.5% per month then the present value of four quarterly payments of 300 would be 1, If the payment schedule changes to 100 per month the present value increase to 1, This represents an increase of 0.50%. PV of 300 in month 3 = 300 (1+0.05) 3 = PV of 300 in month 6 = 300 (1+0.05) 6 = PV of 300 in month 9 = 300 (1+0.05) 9 = PV of 300 in month 12 = 300 (1+0.05) 12 = Sum of PVs = 1, Rather than 12 calculations for the revised monthly charging, we can use an annuity formula: PV = 100 (1/0.05) (1(1+0.05) 12 ) = 1, This is an increase in present value of 5.79, or 0.05% Compounding It is well known that interest rates vary in the way in which they are quoted. Some rates are quoted annually, some semiannually and others such as credit cards are quoted monthly. Because of this, it is sometimes not immediately apparent how to compare different rates. An annualised equivalent rate is often quoted so that comparisons can be made, or a present value calculation might be used to value future cashflows. Question 2
2 You have 1,000 to invest for a full year, which of the following would you prefer, assuming equivalent credit and counterparty risks? (a) A bank deposit offering a simple interest rate of 6% p.a. (b) A security offering a compound annual rate of 6% p.a. (c) A security offering a semiannual rate of 5.96% p.a. (d) A security offering a monthly compounding rate of 5.8% p.a. (e) A security offering a continuously compounded rate of 5.85% p.a. (f) Don t know The right answer is (c) A security offering a semiannual rate of 5.96% p.a. The result for (a) and (b) is the same at 1, For (c) the result is given by 1000 (1+2.98%) 2 = 1, For (d) the result is given by 1,000 (1+(5.8%/12)) 12 = 1, For (e) the result is given by 1,000 e 5.85% = 1, (c) therefore generates the highest return. Inflation Inflation has been an ongoing issue for the British for many years. The first attempt to formally measure household inflation was just after the Second World War based on a basket of goods derived from the household expenditure survey of Over several years the contents of the basket of goods was refined and the Retail Price Index was first published in 1956, by the Cost of Living Advisory Committee. This committee instigated the regular Family Expenditure Survey partly so that the contents of the basket of goods could be continually revised to keep pace with changing purchasing trends. Among many technical changes from the index inception, from today s perspective it is interesting to note the following: meals out were included from 1968, Housing and mortgage costs were revised in 1975 The Tax and Price Index was introduced in 1979 Mortgage payments were excluded to give RPIX in 1992 The Consumer Price Index (CPI) has a much shorter history. It started life in 1996 as the Harmonised Index of Consumer Prices (HICP). Similar indices were developed across the EU as a means of determining the inflation convergence criteria for joining the Euro. As such the construction and coverage of the HICP are defined legally in European regulations. In 2003 the name was changed to the Consumer Prices Index (CPI) and it was designated as the official target rate for UK inflation by the then Chancellor. Question 3 There are differences between RPI and CPI. Which of the following lists what is included in RPI but excluded from CPI? (a) All housing costs (b) Mortgage costs and estate agent s fees (c) Mortgage costs, housing transaction fees and buildings insurance
3 (d) Mortgage costs, housing transaction fees, buildings insurance and council tax (e) Mortgage costs, housing transaction fees, buildings insurance, council tax and house depreciation (f) Mortgage costs, housing transaction fees, buildings insurance, council tax, house depreciation and housing maintenance costs (g) Don t know The right answer is (e) Mortgage costs, housing transaction fees, buildings insurance, council tax and house depreciation. The logic of excluding much of housing cost is due to the international nature of the index there is little that is comparable about the way that different European countries provide for their housing. Council tax is excluded because it is a tax rather than household consumption. This hits at the heart of the difference: the CPI is not intended to be a cost of living index. For the same reason television licences and road fund licences are excluded from CPI but included in RPI. ONS website: Question 4 Potential Impact of a Change to CPI The change in the relevant inflation index to determine annual pension increases may have a profound effect on the present value of future pension liabilities. If there is a long term expectation that the new measure (CPI) will be 0.5% per annum lower than the old measure (RPI) then the amount required to fund future pensions will be reduced. If: Expectation of remaining life after retirement is 20 years The first payment is 100, next year Current discount rates are, and will remain 6% for the period RPI is expected to average 3.5% and CPI is expected to average 3% over the pension period What is the change in the present value of the pension provision if annual pension payments are increased in line with CPI instead of RPI? (a) Reduce by 0.5% (b) Reduce by 2.5% (c) Reduce by 4.1% (d) Reduce by 5.2% (e) Reduce by 6.3% (f) Don t know The right answer is (c) reduce by 4.1% The present value of a twenty year growing annuity (the pension payment) can be calculated by a formula, but conceptually it is easiest to see as the difference between a perpetuity starting next year and a perpetuity starting in year 21 if we deduct the far perpetuity we are left with just the payments for the first 20 years. A perpetuity with the first payment next year has value = cashflow/(discount rate growth rate). RPI
4 We know the components so, if RPI is the inflator we can calculate Value perpetuity starting next year = 100/(6%  3.5%) = 4000 The far perpetuity has a larger first payment, having grown at 3.5% for 20 years: So value perpetuity starting year 21 = ( 100 *(1+3.5%) 20 )/(6%3.5%) = This has a present value of (1+6%) 20 = The difference between the perpetuities is 1, and this is the present value of the pension liability. We can repeat the same calculation using the CPI value of 3% for the inflator and the results are: PV of perpetuity starting next year = 3, PV of perpetuity starting year 21 = 1, Difference = value of pension liability = 1, So the change in use of inflator causes a reduction in PV from 1, to 1,456.15, a reduction of 4.09%, rounded to 4.1%. Question 5 Index linked bonds can have their coupons or their principal amount, or both, linked to inflation. Here we take an example where both coupons and principal are linked. Inflation is expected to fall slightly over the next few years, returning to the long term target rate of 2%. But this year it is expected to be 4.2%, next year the expectation is for 3.7% and the year after that inflation is expected to be down to 3.2%. You have decided to invest in a threeyear indexlinked bond with annual 2.5% coupons, the coupon and principal being indexlinked. If you invest now in the bond being issued at par, and your expectations prove to be accurate, what nominal yield to maturity will you achieve if you hold the bond to maturity? (a) 5.8% p.a. (b) 6.3% p.a. (c) 6.7% p.a. (d) 7.0% p.a. (e) Don t know The right answer is (b) 6.3% p.a. The calculations lend themselves to being tabulated as below. Time Real Cashflow Inflation adjustment Actual cashflow (1+4.2%) = (1+3.7%) = (1+3.2%) = Once the cash flows are established the yield can be found, again using the table format: Time Cashflow PV at 6% PV at 7% 0 (100) (100) (100)
5 NPV 0.83 (1.90) From this it is clear that the yield is between 6% and 7%, because the Net Present Value changes from positive to negative between 6% and 7%. Using the proportions; Yield = 6% +[(0.83/( )) 1%] = 6.305% There is a short cut method which works when the bond is issued and redeemed at par and when the inflation rate remains constant for all periods. Then it is possible to compound together the coupon rate and the inflation rate to get nominal yield = (1+coupon rate) (1+inflation rate) 1. We can use an approximation of that in this instance by estimating the average inflation rate for the period as 3.7%: nominal yield = (1+2.5%) (1+3.7%) 1 = 6.029%, a pretty close approximation! Volume of IndexLinked Gilts and Method of Indexation At the end of March % of the total UK Gilt portfolio were indexlinked, or billion. They are typically semiannual coupon bonds. Coupon payments and principal are adjusted in line with RPI to take account of accrued inflation since the gilt was issued. Despite the Government s announced intention to move to CPI as its main inflation indicator, so far there have been no issues of indexlinked gilts with the inflation link being to CPI rather than RPI. One reason for this may be the desire of purchasers to use the RPI link as a hedge for their corporate pension liabilities, many of which are still linked to RPI rather than CPI. Question 6 For practical reasons the indexation is lagged, otherwise the coupon might be due before the RPI has been calculated, or confirmed. What is the indexation lag for all UK Government Gilts issued since 2005? (a) One month (b) Three months (c) Six months (d) Eight months (e) Don t know The right answer is (b) three months. When indexlinked gilts were first issued the indexation lag was eight months. However, this was revised for new issues in 2005 and since then all issues have used the three month indexation lag. This is regarded as international best practice. The reference rate for, say June 2011 is then the RPI for March In trading, the bonds are priced relative to their 100 real principal value. On settlement the actual price is then the price agreed in the trade times the indexation ratio published by the Debt Management Office for the day in question.
6 Debt Management Office Publication A guide to Gilts &page=investor_guide/guide
How to calculate cash flows on indexlinked gilts
How to calculate cash flows on indexlinked gilts Indexlinked gilts pay semiannual cash flows indexed to the Retail Prices Index (RPI). In practical terms this means that both the coupons and the principal
More informationYou just paid $350,000 for a policy that will pay you and your heirs $12,000 a year forever. What rate of return are you earning on this policy?
1 You estimate that you will have $24,500 in student loans by the time you graduate. The interest rate is 6.5%. If you want to have this debt paid in full within five years, how much must you pay each
More informationThe new inflation target and the monetary policy framework
ANNEX: THE NEW INFLATION TARGET The new inflation target and the monetary policy framework Following his announcement on 9 June 2003, the Chancellor has confirmed that the new inflation target will be
More informationPrepared by: Dalia A. Marafi Version 2.0
Kuwait University College of Business Administration Department of Finance and Financial Institutions Using )Casio FC200V( for Fundamentals of Financial Management (220) Prepared by: Dalia A. Marafi Version
More informationClick Here to Buy the Tutorial
FIN 534 Week 4 Quiz 3 (Str) Click Here to Buy the Tutorial http://www.tutorialoutlet.com/fin534/fin534week4quiz3 str/ For more course tutorials visit www.tutorialoutlet.com Which of the following
More informationManagement Accounting Financial Strategy
PAPER P9 Management Accounting Financial Strategy The Examiner provides a short study guide, for all candidates revising for this paper, to some first principles of finance and financial management Based
More informationINSTITUTE OF ACTUARIES OF INDIA
INSTITUTE OF ACTUARIES OF INDIA EXAMINATIONS 15 th November 2010 Subject CT1 Financial Mathematics Time allowed: Three Hours (15.00 18.00 Hrs) Total Marks: 100 INSTRUCTIONS TO THE CANDIDATES 1. Please
More informationTime Value of Money Concepts
BASIC ANNUITIES There are many accounting transactions that require the payment of a specific amount each period. A payment for a auto loan or a mortgage payment are examples of this type of transaction.
More informationInflation (CPI) futures
Inflation (CPI) futures There is currently not such a thing as exchanged traded futures on inflation or inflation linked bonds. However, there is a growing market on inflationlinked instruments that are
More informationChapter 6. Discounted Cash Flow Valuation. Key Concepts and Skills. Multiple Cash Flows Future Value Example 6.1. Answer 6.1
Chapter 6 Key Concepts and Skills Be able to compute: the future value of multiple cash flows the present value of multiple cash flows the future and present value of annuities Discounted Cash Flow Valuation
More informationFinancial Markets and Valuation  Tutorial 1: SOLUTIONS. Present and Future Values, Annuities and Perpetuities
Financial Markets and Valuation  Tutorial 1: SOLUTIONS Present and Future Values, Annuities and Perpetuities (*) denotes those problems to be covered in detail during the tutorial session (*) Problem
More informationPractice Set #1 and Solutions.
Bo Sjö 140503 Practice Set #1 and Solutions. What to do with this practice set? Practice sets are handed out to help students master the material of the course and prepare for the final exam. These sets
More informationACI THE FINANCIAL MARKETS ASSOCIATION
ACI THE FINANCIAL MARKETS ASSOCIATION EXAMINATION FORMULAE 2009 VERSION page number INTEREST RATE..2 MONEY MARKET..... 3 FORWARDFORWARDS & FORWARD RATE AGREEMENTS..4 FIXED INCOME.....5 FOREIGN EXCHANGE
More informationChapter 02 How to Calculate Present Values
Chapter 02 How to Calculate Present Values Multiple Choice Questions 1. The present value of $100 expected in two years from today at a discount rate of 6% is: A. $116.64 B. $108.00 C. $100.00 D. $89.00
More informationModule 5: Interest concepts of future and present value
Page 1 of 23 Module 5: Interest concepts of future and present value Overview In this module, you learn about the fundamental concepts of interest and present and future values, as well as ordinary annuities
More informationStatistical Models for Forecasting and Planning
Part 5 Statistical Models for Forecasting and Planning Chapter 16 Financial Calculations: Interest, Annuities and NPV chapter 16 Financial Calculations: Interest, Annuities and NPV Outcomes Financial information
More informationExcel Financial Functions
Excel Financial Functions PV() Effect() Nominal() FV() PMT() Payment Amortization Table Payment Array Table NPer() Rate() NPV() IRR() MIRR() Yield() Price() Accrint() Future Value How much will your money
More informationIntroduction to Real Estate Investment Appraisal
Introduction to Real Estate Investment Appraisal Maths of Finance Present and Future Values Pat McAllister INVESTMENT APPRAISAL: INTEREST Interest is a reward or rent paid to a lender or investor who has
More informationFINANCIAL MATHEMATICS FIXED INCOME
FINANCIAL MATHEMATICS FIXED INCOME 1. Converting from Money Market Basis to Bond Basis and vice versa 2 2. Calculating the Effective Interest Rate (Nonannual Payments)... 4 3. Conversion of Annual into
More informationMGT201 Lecture No. 07
MGT201 Lecture No. 07 Learning Objectives: After going through this lecture, you would be able to have an understanding of the following concepts. Discounted Cash Flows (DCF Analysis) Annuities Perpetuity
More informationTime Value of Money. Background
Time Value of Money (Text reference: Chapter 4) Topics Background One period case  single cash flow Multiperiod case  single cash flow Multiperiod case  compounding periods Multiperiod case  multiple
More informationCoupon Bonds and Zeroes
Coupon Bonds and Zeroes Concepts and Buzzwords Coupon bonds Zerocoupon bonds Bond replication Noarbitrage price relationships Zero rates Zeroes STRIPS Dedication Implied zeroes Semiannual compounding
More informationConsumer Price Statistics
Consumer Price Statistics Ainslie Restieaux, Prices Development, ONS Topics covered in the presentation The Consumer Prices Index (CPI), the Retail Prices Index (RPI) and CPIH: History & related measures
More informationThe Time Value of Money
The following is a review of the Quantitative Methods: Basic Concepts principles designed to address the learning outcome statements set forth by CFA Institute. This topic is also covered in: The Time
More informationBasic financial arithmetic
2 Basic financial arithmetic Simple interest Compound interest Nominal and effective rates Continuous discounting Conversions and comparisons Exercise Summary File: MFME2_02.xls 13 This chapter deals
More informationNPV calculation. Academic Resource Center
NPV calculation Academic Resource Center 1 NPV calculation PV calculation a. Constant Annuity b. Growth Annuity c. Constant Perpetuity d. Growth Perpetuity NPV calculation a. Cash flow happens at year
More informationTime Value of Money. Work book Section I True, False type questions. State whether the following statements are true (T) or False (F)
Time Value of Money Work book Section I True, False type questions State whether the following statements are true (T) or False (F) 1.1 Money has time value because you forgo something certain today for
More informationChapter 2 Present Value
Chapter 2 Present Value Road Map Part A Introduction to finance. Financial decisions and financial markets. Present value. Part B Valuation of assets, given discount rates. Part C Determination of riskadjusted
More informationGlobal Financial Management
Global Financial Management Bond Valuation Copyright 999 by Alon Brav, Campbell R. Harvey, Stephen Gray and Ernst Maug. All rights reserved. No part of this lecture may be reproduced without the permission
More informationFinancial and Investment Mathematics. Dr. Eva Cipovová Department of Business Management Email: evacipovova@gmail.com
Financial and Investment Mathematics Dr. Eva Cipovová Department of Business Management Email: evacipovova@gmail.com Content 1. Interest and annual interest rate. Simple and compound interest, frequency
More informationSOCIETY OF ACTUARIES FINANCIAL MATHEMATICS EXAM FM SAMPLE QUESTIONS
SOCIETY OF ACTUARIES EXAM FM FINANCIAL MATHEMATICS EXAM FM SAMPLE QUESTIONS This page indicates changes made to Study Note FM0905. April 28, 2014: Question and solutions 61 were added. January 14, 2014:
More informationCHAPTER 8 INTEREST RATES AND BOND VALUATION
CHAPTER 8 INTEREST RATES AND BOND VALUATION Answers to Concept Questions 1. No. As interest rates fluctuate, the value of a Treasury security will fluctuate. Longterm Treasury securities have substantial
More informationValuation Report on Prudential Annuities Limited as at 31 December 2003. The investigation relates to 31 December 2003.
PRUDENTIAL ANNUITIES LIMITED Returns for the year ended 31 December 2003 SCHEDULE 4 Valuation Report on Prudential Annuities Limited as at 31 December 2003 1. Date of investigation The investigation relates
More informationFin 3312 Sample Exam 1 Questions
Fin 3312 Sample Exam 1 Questions Here are some representative type questions. This review is intended to give you an idea of the types of questions that may appear on the exam, and how the questions might
More informationPresent Value Concepts
Present Value Concepts Present value concepts are widely used by accountants in the preparation of financial statements. In fact, under International Financial Reporting Standards (IFRS), these concepts
More informationIndex Numbers ja Consumer Price Index
1 Excel and Mathematics of Finance Index Numbers ja Consumer Price Index The consumer Price index measures differences in the price of goods and services and calculates a change for a fixed basket of goods
More informationCHAPTER 5. Interest Rates. Chapter Synopsis
CHAPTER 5 Interest Rates Chapter Synopsis 5.1 Interest Rate Quotes and Adjustments Interest rates can compound more than once per year, such as monthly or semiannually. An annual percentage rate (APR)
More informationPresent Value (PV) Tutorial
EYK 151 Present Value (PV) Tutorial The concepts of present value are described and applied in Chapter 15. This supplement provides added explanations, illustrations, calculations, present value tables,
More informationI. Readings and Suggested Practice Problems. II. Risks Associated with DefaultFree Bonds
Prof. Alex Shapiro Lecture Notes 13 Bond Portfolio Management I. Readings and Suggested Practice Problems II. Risks Associated with DefaultFree Bonds III. Duration: Details and Examples IV. Immunization
More information15.401. Lecture Notes
15.401 15.401 Finance Theory I Haoxiang Zhu MIT Sloan School of Management Lecture 2: Present Value Lecture Notes Key concept of Lecture 1 Opportunity cost of capital True or False? A company s 10year
More informationApEx 2. Investment and Risk
ApEx 2 Investment and Risk 1 Summary of Learning Outcomes AES1/200504 Financial Services Skills Council 2004 16 2 LEARNING OUTCOME H1 INTEGRATED LEARNING OUTCOME FOR THE APPROPRIATE EXAMINATIONS STANDARDS
More informationFinancial Math on Spreadsheet and Calculator Version 4.0
Financial Math on Spreadsheet and Calculator Version 4.0 2002 Kent L. Womack and Andrew Brownell Tuck School of Business Dartmouth College Table of Contents INTRODUCTION...1 PERFORMING TVM CALCULATIONS
More informationCHAPTER 8 INTEREST RATES AND BOND VALUATION
CHAPTER 8 INTEREST RATES AND BOND VALUATION Solutions to Questions and Problems 1. The price of a pure discount (zero coupon) bond is the present value of the par value. Remember, even though there are
More informationBonds are IOUs. Just like shares you can buy bonds on the world s stock exchanges.
Investing in bonds Despite their names, ShareScope and SharePad are not just all about shares. They can help you with other investments as well. In this article I m going to tell you how you can use the
More informationPowerPoint. to accompany. Chapter 5. Interest Rates
PowerPoint to accompany Chapter 5 Interest Rates 5.1 Interest Rate Quotes and Adjustments To understand interest rates, it s important to think of interest rates as a price the price of using money. When
More informationHow to Calculate Present Values
How to Calculate Present Values Michael Frantz, 20100922 Present Value What is the Present Value The Present Value is the value today of tomorrow s cash flows. It is based on the fact that a Euro tomorrow
More informationAssumptions for financial planning. Robert Lockie FIFP CFP CM
Assumptions for financial planning Robert Lockie FIFP CFP CM You don t need assumptions if you can reliably and consistently predict the future General considerations Real or nominal? Forwardlooking Pre
More informationQ1 QUARTERLY GUIDE PENSIONS ACCOUNTING
Q1 QUARTERLY GUIDE PENSIONS ACCOUNTING As at 31 March 2015 Guidance for Finance Directors In association with 1 QUARTERLY GUIDE TO IAS 19 ASSUMPTIONS REPORT MARCH 2015 QUARTERLY GUIDE TO PENSIONS ACCOUNTING
More information1. If the opportunity cost of capital is 14 percent, what is the net present value of the factory?
MØA 155  Fall 2011 PROBLEM SET: Hand in 1 Exercise 1. An investor buys a share for $100 and sells it five years later, at the end of the year, at the price of $120.23. Each year the stock pays dividends
More informationBF 6701 : Financial Management Comprehensive Examination Guideline
BF 6701 : Financial Management Comprehensive Examination Guideline 1) There will be 5 essay questions and 5 calculation questions to be completed in 1hour exam. 2) The topics included in those essay and
More informationDiscounted Cash Flow Valuation
Discounted Cash Flow Valuation Chapter 5 Key Concepts and Skills Be able to compute the future value of multiple cash flows Be able to compute the present value of multiple cash flows Be able to compute
More informationSolutions to Supplementary Questions for HP Chapter 5 and Sections 1 and 2 of the Supplementary Material. i = 0.75 1 for six months.
Solutions to Supplementary Questions for HP Chapter 5 and Sections 1 and 2 of the Supplementary Material 1. a) Let P be the recommended retail price of the toy. Then the retailer may purchase the toy at
More informationMBA Finance PartTime Present Value
MBA Finance PartTime Present Value Professor Hugues Pirotte Spéder Solvay Business School Université Libre de Bruxelles Fall 2002 1 1 Present Value Objectives for this session : 1. Introduce present value
More informationUSING THE SHARP EL 738 FINANCIAL CALCULATOR
USING THE SHARP EL 738 FINANCIAL CALCULATOR Basic financial examples with financial calculator steps Prepared by Colin C Smith 2010 Some important things to consider 1. These notes cover basic financial
More informationIntroduction to Bonds
Bonds are a debt instrument, where the bond holder pays the issuer an initial sum of money known as the purchase price. In turn, the issuer pays the holder coupon payments (annuity), and a final sum (face
More informationChapter 5 Time Value of Money 2: Analyzing Annuity Cash Flows
1. Future Value of Multiple Cash Flows 2. Future Value of an Annuity 3. Present Value of an Annuity 4. Perpetuities 5. Other Compounding Periods 6. Effective Annual Rates (EAR) 7. Amortized Loans Chapter
More informationST334 ACTUARIAL METHODS
ST334 ACTUARIAL METHODS version 214/3 These notes are for ST334 Actuarial Methods. The course covers Actuarial CT1 and some related financial topics. Actuarial CT1 which is called Financial Mathematics
More informationHOW TO CALCULATE PRESENT VALUES
Chapter 2 HOW TO CALCULATE PRESENT VALUES Brealey, Myers, and Allen Principles of Corporate Finance 11th Edition McGrawHill/Irwin Copyright 2014 by The McGrawHill Companies, Inc. All rights reserved.
More informationAnalysis of Deterministic Cash Flows and the Term Structure of Interest Rates
Analysis of Deterministic Cash Flows and the Term Structure of Interest Rates Cash Flow Financial transactions and investment opportunities are described by cash flows they generate. Cash flow: payment
More informationThe ABI s Response to the DMO s consultation document
CPIlinked Gilts The ABI s Response to the DMO s consultation document Introduction 1. This is the response of the Association of British Insurers (ABI) to the Debt Management Office s consultation on
More informationHow to calculate present values
How to calculate present values Back to the future Chapter 3 Discounted Cash Flow Analysis (Time Value of Money) Discounted Cash Flow (DCF) analysis is the foundation of valuation in corporate finance
More informationModule 5: Interest concepts of future and present value
file:///f /Courses/201011/CGA/FA2/06course/m05intro.htm Module 5: Interest concepts of future and present value Overview In this module, you learn about the fundamental concepts of interest and present
More information1. If you wish to accumulate $140,000 in 13 years, how much must you deposit today in an account that pays an annual interest rate of 14%?
Chapter 2  Sample Problems 1. If you wish to accumulate $140,000 in 13 years, how much must you deposit today in an account that pays an annual interest rate of 14%? 2. What will $247,000 grow to be in
More informationTime Value of Money. Reading 5. IFT Notes for the 2015 Level 1 CFA exam
Time Value of Money Reading 5 IFT Notes for the 2015 Level 1 CFA exam Contents 1. Introduction... 2 2. Interest Rates: Interpretation... 2 3. The Future Value of a Single Cash Flow... 4 4. The Future Value
More informationNOTES ON THE BANK OF ENGLAND UK YIELD CURVES
NOTES ON THE BANK OF ENGLAND UK YIELD CURVES The MacroFinancial Analysis Division of the Bank of England estimates yield curves for the United Kingdom on a daily basis. They are of three kinds. One set
More informationLongTerm Debt. Objectives: simple present value calculations. Understand the terminology of longterm debt Par value Discount vs.
Objectives: LongTerm Debt! Extend our understanding of valuation methods beyond simple present value calculations. Understand the terminology of longterm debt Par value Discount vs. Premium Mortgages!
More informationIf Alfred s endowment was payable in five years time what sum should be payable to make both of equal value?
FUTURE VALUE OF A SINGLE SUM Question 1 Alfred and George are brothers. They have both been given an endowment of 5,000 by Great Uncle Edward. George will receive his money immediately whilst Alfred must
More informationInterest Rate Changes
Interest Rate Changes We are committed to keeping you informed and uptodate on changes in the interest rates for our fixed and variable rate products. Included are details of rate changes that have applied
More informationEXAM 2 OVERVIEW. Binay Adhikari
EXAM 2 OVERVIEW Binay Adhikari FEDERAL RESERVE & MARKET ACTIVITY (BS38) Definition 4.1 Discount Rate The discount rate is the periodic percentage return subtracted from the future cash flow for computing
More informationMathematics. Rosella Castellano. Rome, University of Tor Vergata
and Loans Mathematics Rome, University of Tor Vergata and Loans Future Value for Simple Interest Present Value for Simple Interest You deposit E. 1,000, called the principal or present value, into a savings
More informationCalculation Convention for Inflation Linked Bond
Calculation Convention for Inflation Linked Bond Bond Pricing and Product Development The Thai Bond Market Association (ThaiBMA) Introduction In May 0, Thai bond market will probably have a new type of
More informationTime Value of Money (TVM) A dollar today is more valuable than a dollar sometime in the future...
Lecture: II 1 Time Value of Money (TVM) A dollar today is more valuable than a dollar sometime in the future...! The intuitive basis for present value what determines the effect of timing on the value
More informationReview Solutions FV = 4000*(1+.08/4) 5 = $4416.32
Review Solutions 1. Planning to use the money to finish your last year in school, you deposit $4,000 into a savings account with a quoted annual interest rate (APR) of 8% and quarterly compounding. Fifteen
More informationVilnius University. Faculty of Mathematics and Informatics. Gintautas Bareikis
Vilnius University Faculty of Mathematics and Informatics Gintautas Bareikis CONTENT Chapter 1. SIMPLE AND COMPOUND INTEREST 1.1 Simple interest......................................................................
More informationSolutions to Practice Questions (Bonds)
Fuqua Business School Duke University FIN 350 Global Financial Management Solutions to Practice Questions (Bonds). These practice questions are a suplement to the problem sets, and are intended for those
More informationProblem Set: Annuities and Perpetuities (Solutions Below)
Problem Set: Annuities and Perpetuities (Solutions Below) 1. If you plan to save $300 annually for 10 years and the discount rate is 15%, what is the future value? 2. If you want to buy a boat in 6 years
More informationChapter 4 Time Value of Money ANSWERS TO ENDOFCHAPTER QUESTIONS
Chapter 4 Time Value of Money ANSWERS TO ENDOFCHAPTER QUESTIONS 41 a. PV (present value) is the value today of a future payment, or stream of payments, discounted at the appropriate rate of interest.
More informationBasis for setting the discount rate for calculating cash equivalent transfer values payable by public service pension schemes
Basis for setting the discount rate for calculating cash equivalent transfer values payable by public service pension schemes updated guidance issued by HM Treasury March 2011 Official versions of this
More informationStock and Bond Valuation: Annuities and Perpetuities
Stock and Bond Valuation: Annuities and Perpetuities Lecture 3, slides 3.1 Brais Alvarez Pereira LdM, BUS 332 F: Principles of Finance, Spring 2016 February 23, 2016 Important Shortcut Formulas Present
More information1. What are the three types of business organizations? Define them
Written Exam Ticket 1 1. What is Finance? What do financial managers try to maximize, and what is their second objective? 2. How do you compare cash flows at different points in time? 3. Write the formulas
More informationEquityindexlinked swaps
Equityindexlinked swaps Equivalent to portfolios of forward contracts calling for the exchange of cash flows based on two different investment rates: a variable debt rate (e.g. 3month LIBOR) and the
More informationExercise 6 Find the annual interest rate if the amount after 6 years is 3 times bigger than the initial investment (3 cases).
Exercise 1 At what rate of simple interest will $500 accumulate to $615 in 2.5 years? In how many years will $500 accumulate to $630 at 7.8% simple interest? (9,2%,3 1 3 years) Exercise 2 It is known that
More informationCollege of Business Administration Savannah State University Personal Finance (BUSA 3000) Quiz 1 Fall 2011 Dr. William A. Dowling.
College of Business Administration Savannah State University Personal Finance (BUSA 3000) Quiz 1 Fall 2011 Dr. William A. Dowling Exam Key Instructions: You are to answer each of the following. If the
More informationChapter 6 Interest Rates and Bond Valuation
Chapter 6 Interest Rates and Bond Valuation Solutions to Problems P61. P62. LG 1: Interest Rate Fundamentals: The Real Rate of Return Basic Real rate of return = 5.5% 2.0% = 3.5% LG 1: Real Rate of Interest
More informationANALYSIS OF FIXED INCOME SECURITIES
ANALYSIS OF FIXED INCOME SECURITIES Valuation of Fixed Income Securities Page 1 VALUATION Valuation is the process of determining the fair value of a financial asset. The fair value of an asset is its
More informationFinding the Payment $20,000 = C[1 1 / 1.0066667 48 ] /.0066667 C = $488.26
Quick Quiz: Part 2 You know the payment amount for a loan and you want to know how much was borrowed. Do you compute a present value or a future value? You want to receive $5,000 per month in retirement.
More informationCHAPTER 1. Compound Interest
CHAPTER 1 Compound Interest 1. Compound Interest The simplest example of interest is a loan agreement two children might make: I will lend you a dollar, but every day you keep it, you owe me one more penny.
More information1 Cashflows, discounting, interest rate models
Assignment 1 BS4a Actuarial Science Oxford MT 2014 1 1 Cashflows, discounting, interest rate models Please hand in your answers to questions 3, 4, 5 and 8 for marking. The rest are for further practice.
More informationOptions for improving the Retail Prices Index
Options for improving the Retail Prices Index The ABI s Response to the National Statistician s consultation The UK Insurance Industry The UK insurance industry is the third largest in the world and the
More informationStandard Life announced a review of its UK withprofits bonus rates on 28 January 2016.
Standard Life Assurance Limited Withprofits bonus declaration 28 January 2016 Standard Life announced a review of its UK withprofits bonus rates on 28 January 2016. Most customers will have a seen a
More informationTime Value of Money. 2014 Level I Quantitative Methods. IFT Notes for the CFA exam
Time Value of Money 2014 Level I Quantitative Methods IFT Notes for the CFA exam Contents 1. Introduction... 2 2. Interest Rates: Interpretation... 2 3. The Future Value of a Single Cash Flow... 4 4. The
More informationSOCIETY OF ACTUARIES FINANCIAL MATHEMATICS. EXAM FM SAMPLE QUESTIONS Interest Theory
SOCIETY OF ACTUARIES EXAM FM FINANCIAL MATHEMATICS EXAM FM SAMPLE QUESTIONS Interest Theory This page indicates changes made to Study Note FM0905. January 14, 2014: Questions and solutions 58 60 were
More information2. How would (a) a decrease in the interest rate or (b) an increase in the holding period of a deposit affect its future value? Why?
CHAPTER 3 CONCEPT REVIEW QUESTIONS 1. Will a deposit made into an account paying compound interest (assuming compounding occurs once per year) yield a higher future value after one period than an equalsized
More informationREVIEW MATERIALS FOR REAL ESTATE ANALYSIS
REVIEW MATERIALS FOR REAL ESTATE ANALYSIS 1997, Roy T. Black REAE 5311, Fall 2005 University of Texas at Arlington J. Andrew Hansz, Ph.D., CFA CONTENTS ITEM ANNUAL COMPOUND INTEREST TABLES AT 10% MATERIALS
More informationCALCULATOR TUTORIAL. Because most students that use Understanding Healthcare Financial Management will be conducting time
CALCULATOR TUTORIAL INTRODUCTION Because most students that use Understanding Healthcare Financial Management will be conducting time value analyses on spreadsheets, most of the text discussion focuses
More informationBonds. Describe Bonds. Define Key Words. Created 2007 By Michael Worthington Elizabeth City State University
Bonds OBJECTIVES Describe bonds Define key words Explain why bond prices fluctuate Compute interest payments Calculate the price of bonds Created 2007 By Michael Worthington Elizabeth City State University
More informationKENT FAMILY FINANCES
FACTS KENT FAMILY FINANCES Ken and Kendra Kent have been married twelve years and have twin 4yearold sons. Kendra earns $78,000 as a Walmart assistant manager and Ken is a stayathome dad. They give
More information5.5 The Opportunity Cost of Capital
Problems 161 The correct discount rate for a cash flow is the expected return available in the market on other investments of comparable risk and term. If the interest on an investment is taxed at rate
More informationGeneral Government Debt
2 Government Debt 2.1 Revenues from taxation and other charges represent the primary source of State funding, but the State also borrows substantially to supplement annual funding. This report outlines
More informationChapter 21: Savings Models
October 16, 2013 Last time Arithmetic Growth Simple Interest Geometric Growth Compound Interest A limit to Compounding Problems Question: I put $1,000 dollars in a savings account with 2% nominal interest
More information