Annuities with Different Compounding Frequencies
In all the above examples for annuities, we assumed that the compounding frequency is annual. However, this may not always be the case and an annuity may have monthly, quarterly, or even semi-annual...
View ArticleUsing a Timeline to Solve Time Value of Money Problems
When solving a time value of money problem, it is sometimes easy to draw a timeline to present the cash flows on it. Once we have the timeline, we can easily understand the variables and visualize the...
View ArticleDiscounted Cash Flow Applications
The post Discounted Cash Flow Applications appeared first on Finance Train.
View ArticleNet Present Value
The net present value is the most commonly used method to decide whether to invest in a project or not. The net present value of a project is equal to the sum of the present value of all after-tax cash...
View ArticleInternal Rate of Return
IRR is the case of a discount rate that equalizes the present value of cash inflows with present value of cash outflows. Within the context of a net present value analysis, when the cash inflows and...
View ArticleConflict Between NPV and IRR (And Problem with IRR)
When you are analyzing a single conventional project, both NPV and IRR will provide you the same indicator about whether to accept the project or not. However, when comparing two projects, the NPV and...
View ArticleHolding Period Return (Total Return)
For investments, the Holding Period Return (HPR) refers to the total return earned from an investment or an investment portfolio over the holding period, that is, the period for which the asset or...
View ArticleTime-weighted Returns
While calculating the returns on financial assets, we will often look at the returns from multiple holding periods. For example, one may hold an asset for five years, and the asset may have earned...
View ArticleMoney-weighted Returns
We learned about arithmetic returns and geometric returns. However, the problem with these measures is that they do not consider the amount of investment made in each period. For example, in the first...
View ArticleHow to Calculate Annualized Returns
When we make investments, we invest our money in different assets and earn returns for different periods of time. For example, an investment in a short-term Treasury bill will be for 3 months. We may...
View ArticleYield Measures for Money Market Instruments
In addition to issuing long term bonds, governments also issue short-term instruments such as Treasury bills (T bills) of up to one year maturity. T-bills do not carry a coupon, but are sold on a...
View ArticleBank Discount Yield
T-bills are quoted on a bank discount yield basis. The bank discount yield is calculated using the following formula: Let’s take an example. The quoted price for a 90-day T-bill is USD 975,342 with a...
View ArticleHolding Period Yield (HPY)
For investments, the Holding Period Yield (HPY) or Holding Period Return (HPR) refers to the total return earned from an investment or an investment portfolio over the holding period, that is, the...
View ArticleTypes of Measurement Scales
Depending on the information we want the data to represent, we can choose one of the four measurement scales. Nominal Scale Used to classify data Observations are put into categories based on some...
View ArticleRelative Frequencies and Cumulative Relative Frequencies
The data in a frequency distribution can also be presented using relative frequencies. Once we have relative frequencies, we can calculate cumulative relative frequencies where as we move from first...
View ArticleProperties of a Data Set (Histogram / Frequency Polygon)
Histogram The data in a frequency distribution can be presented using a histogram. A histogram is a bar chart with different intervals on the X-axis and the absolute frequencies on the Y-axis. The...
View ArticleMeasures of Central Tendency
The measures of central tendency identify what is the center of a data set. These are the most widely used tools among all the statistical measures. The most commonly used measures of central tendency...
View ArticleCalculating Arithmetic Mean
Arithmetic mean is the simple average of all observations and is calculated by adding all the observations and dividing it by the total number of observations. We can calculate arithmetic mean for both...
View ArticleCalculating Weighted Average Mean
One characteristic of an arithmetic mean is that all observations have equal weight (=1/N). However, this may not always be the case. In some cases, different observations may influence the mean...
View ArticleCalculating Geometric Mean
One problem with arithmetic mean is that it assumes the returns on the investment made at the beginning of each period. So, for each period the beginning investment amount is assumed to be the same. It...
View Article