Quantitative Methods

Study Session 2 (parte 1)

Programa integral de preparación para CFA – Nivel 1

Study Session 2

Quantitative Methods: Basic Concepts

• LOS 5: The Time Value of Money

• LOS 6: Discounted Cash Flow Applications

• LOS 7: Statistical Concepts and Market Returns

• LOS 8: Probability Concepts

Study Session 2
Study Session 2
Quantitative Methods
Study Session 2 (LOS 5)

Programa integral de preparación para CFA – Nivel 1

Interpreting Interest Rates

LOS 5.a, CFAI Vol. 1 p. 256

• Equilibrium interest rates are the required rate of return for a particular
investment

• Interest rates are also referred to as discount rates

• We can also view interest rates as the opportunity cost of current consumption
because future consumption could be i% higher
Components of Interest Rates

LOS 5.b, CFAI Vol. 1 p. 257

• Required (nominal) interest rate on a security =

real risk-free rate

+ expected inflation
+ default risk premium
+ liquidity premium
+ maturity risk premium
Effective Annual Rates – Example

LOS 5.c, CFAI Vol. 1 p. 263

Assume the stated annual rate is 12%

12
Semiannual Compounding i = =6 m=2
2
EAR = 1.062  1 = 12.36%
12
Quarterly Compounding i= =3 m=4
4
EAR = 1.034  1 = 12.55%
12
Monthly Compounding i= = 1 m = 12
12
EAR = 1.0112  1 = 12.68%
TVM With m ≠ 1 – Example

LOS 5.d, CFAI Vol. 1 p. 263

PV of a Perpetuity

LOS 5.e, CFAI Vol. 1 p. 258

FV of Single Sum

LOS 5.e,f, CFAI Vol. 1 p. 258

PV of Single Sum

LOS 5.e,f, CFAI Vol. 1 p. 258

PV of an Ordinary Annuity

LOS 5.e,f, CFAI Vol. 1 p. 258

FV of an Ordinary Annuity

LOS 5.e,f, CFAI Vol. 1 p. 258

PV of an Annuity Due

LOS 5.e,f, CFAI Vol. 1 p. 258

FV of Uneven Cash Flows

LOS 5.e,f, CFAI Vol. 1 p. 258

PV of Uneven Cash Flows

LOS 5.e,f, CFAI Vol. 1 p. 258

Mortgage Example

LOS 5.d,e, CFAI Vol. 1 p. 263

Retirement Savings – Problem
Calculating I/Y – Problem
Calculating N – Problem
Quantitative Methods
Study Session 2 (LOS 6)

Programa integral de preparación para CFA – Nivel 1

Net Present Value (NPV)

LOS 6.a, CFAI Vol. 1 p. 312

Net Present Value (NPV)

LOS 6.a, CFAI Vol. 1 p. 312

Internal Rate of Return (IRR)

LOS 6.a, CFAI Vol. 1 p. 312

Internal Rate of Return (IRR)

LOS 6.a, CFAI Vol. 1 p. 312

Possible Problems With IRR

LOS 6.b, CFAI Vol. 1 p. 317

Holding Period Return (HPR) Example

LOS 6.c, CFAI Vol. 1 p. 319

Time-Weighted Returns

LOS 6.d, CFAI Vol. 1 p. 320

Money-Weighted Returns

LOS 6.d, CFAI Vol. 1 p. 320

BDY, HPY, EAY, MMY

LOS 6.e, CFAI Vol. 1 p. 327

Yield Example: 90-day T-bill Priced $980

LOS 6.e, CFAI Vol. 1 p. 327

Bond Equivalent Yield (BEY)

LOS 6.f, CFAI Vol. 1 p. 327

Yield Measures – Problem
Except when otherwise referenced, all materials are sourced from: