Notes of CFA Level1 READING 6: THE TIME VALUE OF MONEY

TVM：time value of money

PV: present value    discounting

FV: future value    compounding 

Calculators: the TI BAII Plus® (including the BAII Plus Professional) and the HP 12C® (including the HP 12C Platinum).

Set your P/Y key to “1” using the following sequence of keystrokes: [2nd] [P/Y] “1” [ENTER] [2nd] [QUIT]

receipts: cash inflows

nominal risk-free rate = real risk-free rate + expected inflation rate

Securities(证券) may have one or more types of risk, and each added risk increases the
required rate of return on the security. These types of risk are:
Default risk. The risk that a borrower will not make the promised payments in a
timely manner.
Liquidity risk. The risk of receiving less than fair value for an investment if it
must be sold for cash quickly.
Maturity risk. As we will cover in detail in the section on debt securities, the
prices of longer-term bonds are more volatile than those of shorter-term bonds.
Longer maturity bonds have more maturity risk than shorter-term bonds and
require a maturity risk premium.

required interest rate on a security = nominal risk-free rate + default risk premium + liquidity premium + maturity risk premium

effective annual rate (EAR) or effective annual yield (EAY).

annuity：年金，养老金；年金享受权；年金保险

ordinary annuities：characterized by cash flows that occur at the end of each compounding period.

annuities due：payments or receipts occur at the beginning of each period

Present Value of a Perpetuity（永续年金的现值）：Most preferred stocks are examples of perpetuities since they promise fixed interest or dividend payments forever.

Present Value of a Perpetuity=PMT/rate of return=PMT/（1/Y）