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Rotman Commerce (300)

RSM332H1 (10)

Kevin Wang (5)

Midterm

Department

Rotman CommerceCourse Code

RSM332H1Professor

Kevin WangStudy Guide

MidtermThis

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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 ineor illingne o b he bond eg

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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