Notes of CFA Level1 READING 7: DISCOUNTED CASH FLOW APPLICATIONS

 

net present value (NPV)

internal rate of return (IRR):the IRR may be defined as the discount rate for which the NPV of an investment is zero.

interim payment 临时付款

The money-weighted rate of return is defined as the internal rate of return on a portfolio, taking into account all cash inflows and outflows.

Time-weighted rate of return measures compound growth.（计算实例见Kaplan Notes Quantitative P124）

Compute the product of (1 + HPR) for each subperiod to obtain a total return for the entire measurement period [i.e., (1 + HPR1) × (1 + HPR2) … (1 + HPRn)] – 1. If the total investment period is greater than one year, you must take the geometric mean of the measurement period return to find the annual time-weighted rate of return.

In the investment management industry, the time-weighted rate of return is the preferred method of performance measurement, because it is not affected by the timing of cash inflows and outflows.

bank discount yield（BDY）：rBD=(D/F)*(360/t)

F = the face value (par value) of the bill 

D = the dollar discount, which is equal to the difference between the face value of the
bill and the purchase price

360 = bank convention of number of days in a year

Holding period yield (HPY)  HPY=(P1+D1)/P0-1

effective annual yield (EAY)  EAY = (1 + HPY)^(365 / t) − 1

money market yield (or CD equivalent yield)    rMM = HPY × (360/t)

rMM=(350*rBD)/(360-(t*rBD))  (Kaplan Notes P128)

• The HPY is the actual return an investor will receive if the money market instrument is held until maturity.
• The EAY is the annualized HPY on the basis of a 365-day year and incorporates the effects of compounding.
• The rMM is the annualized yield that is based on price and a 360-day year and does not account for the effects of compounding—it assumes simple interest.

Bond Equivalent Yield
The bond equivalent yield refers to 2 × the semiannual discount rate. This convention stems from the fact that yields on U.S. bonds are quoted as twice the semiannual rate, because the coupon interest is paid in two semiannual payments