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Midterm

RSM332H1 Midterm: midterm summary (2)


Department
Rotman Commerce
Course Code
RSM332H1
Professor
Kevin Wang
Study Guide
Midterm

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1
1. Time-value of money
1.1 Single Cash flow
i) Present value and future value
  
ii) Compounding frequency


 for yearly, semi-annually, quarterly,
monthly frequency.
  for continuous compounding
e.g., stock price process
iii) Effective annual rate (EAR): what would be the
interest rate if an investment gives you an annual
compounding.
  

  

1.2 Multiple Cash flow
i) Growing annuity


Note: This is the value of all future cash flows one period
before is generated. is not a cash flow today.
ii) Annuity


: Used for mortgages (Be careful about the convention
quote semi annul rate *2 and monthly compounding.
Adjust r and T in the formula), to value a level coupon
bond.
iii) Growing perpetuity

ii) Perpetuity

1.3 Etc: Simple interest VS compound, NPV
2. Bond valuation
2.1 Three types of bonds by payment structure
i) Level-coupon bond price

where is the coupon payment (Face value x coupon
rate)
Note: If you are dealing with semi-annual coupon, you
have to adjust .
Ex) 5% discount rate, 6% coupon rate, 5-year maturity.
C = 1,000*0.06/2, r=0.05/2, T = 5*2
ii) For zero coupon,  
iii) For zero face value,  
2.2 Etc:
i) Bond VS stock:
a) Bond gives you predetermined cash flows vs cash
flows are uncertain from stock
b) legal obligation vs ownership
ii) Holding period return: (Selling price + coupon
buying price)/buying price
iii) YTM: aggregates all characteristics of a bond which
affec ineor illingne o b he bond eg
inflation, liquidity, credit risk)
iv) Duration : effectively how long does it take to recover
your investment?

   Æ mathematically related to a slope for a
percent change in the bond price. Duration captures
interest rate risk.
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