Term
|
Definition
-The sum of the PVs of a series of CFs
-The rate used to discount is appropriate cost of capital (reflects the OC of undertaking the investment and compensates investors for various risks inherent in the project)
+ --> increase shareholder wealth; accept
- ---> decrease shareholder wealth; reject |
|
|
Term
|
Definition
-discount rate that equates the PV of a series of CFs to their cost (makes the NPV=0)
-IRR>required rate of return (return that could be earned by alternate investments) ACCEPT
-IRR< required rate of return REJECT |
|
|
Term
|
Definition
Conflicting conclusions when:
1) projects' initial cash outlays are different
2) difference in timing of the CFs across the projects
-NPV assumes interim CFs from project will be reinvested at the required rate of return
-IRR assumes they will be reinvest at the IRR |
|
|
Term
|
Definition
1)More than one IRR
--> if series of CFs has more than one sign change
2) No IRR problem |
|
|
Term
|
Definition
-the return earned on an investment over the entire investment horizon
--> most returns you see are only annualized returns |
|
|
Term
|
Definition
-the return earned on an investment over the entire investment horizon
--> most returns you see are only annualized returns |
|
|
Term
|
Definition
-the return earned on an investment over the entire investment horizon
--> most returns you see are annualized returns |
|
|
Term
| Money-weighted rate of return |
|
Definition
-portfolio performance measure (reflects upon portfolio manager)
-applies IRR concept
**depends on magnitude and timing of cash inflows/outflows |
|
|
Term
|
Definition
-portfolio performance measure
-measures the compounded rate of growth of an investment over the stated measurement period
-does not depend on magnitude and timing of cash inflow/outflow
-better measure if fund manager doesn't have control on timing of cash inflows/outflows
-depends on investment decisions of portfolio manager |
|
|
Term
|
Definition
-portfolio performance measure
-measures the compounded rate of growth of an investment over the stated measurement period
-basically the geometric mean of sub period returns
-does not depend on magnitude and timing of cash inflow/outflow
-better measure if fund manager doesn't have control on timing of cash inflows/outflows
-depends on investment decisions of portfolio manager |
|
|
Term
| Geometric vs arithmetic mean |
|
Definition
-geometric gain links percentage gains and losses from one period to another
-arithmetic return calculates data as if they were independent from one another |
|
|
Term
| Money weighted vs Time weighted outcomes |
|
Definition
-if funds are deposited to the investment portfolio prior to a period of superior performance, the money weighted return will be HIGHER than the time weighted return
-funds deposited before poor performance, money weighted return will be LOWER than time-weighted return |
|
|
Term
| Bank Discount Yield (equation and concept) |
|
Definition
rBD= (D/F) * (360/t)
rBD is the bank discount yield
D is the dollar discount (face value - purchase price)
F is the face value of the T-bill
t=actual number of days remaining to maturity
360 = BANK convention of # of days in a year
-measure of a bonds percentage return
-quoting convention that ANNUALIZES the discount as a percentage of face value (par) based on a 360 DAY YEAR
-used for T-Bills (quoted on a bank discount basis rather than on price basis) |
|
|
Term
| Bank Discount Yield (flaws) |
|
Definition
1) Yield is based on face value of the bill and not on its purchase price.
-->returns from investments should be evaluated relative to amount that is invested!!
2) annualized based on a 360 day year rather than 365 day
3) yield annualizes w simple interest, ignoring the opportunity to earn interest on interest (compound interest) |
|
|
Term
|
Definition
HPY= (P1-P0+D1)/P0 = [(P1+ D1)/P0] - 1
-return realized on an investment over the entire horizon that it is held
-UNANNUALIZED return measure |
|
|
Term
|
Definition
| EAY = [(1+HPY)^(365/t)] - 1 |
|
|
Term
|
Definition
rMM = HPY x (360/t)
rMM is the money market yield
-makes use of simple interest than compound interest
-uses 360 day year
-BETTER thank BDY bc it uses HPY (returns to investment instead of par) |
|
|
Term
|
Definition
BEY= 2 * 6 month yield
-BEY-semi-annual discount rate multiplied by two
-reason for it: most bonds pay coupons semi-annually
-->in US bonds are quoted at twice the semi-annual rate bc coupons payments are made semi-annually |
|
|
Term
| convert bank discount yield to money market yield |
|
Definition
| rMM = (360 * rBD)/(360-(t*rBD)) |
|
|
