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Handbook for

Formulas
List of formulas for
CFA Level 1
TIME VALUE OF MONEY
1 1RPLQDOLQWHUHVWUDWH UHDOULVNIUHHUDWHH[SHFWHGLQIODWLRQUDWH
2 Required interest rate on security= nominal risk-free rate + default risk premium+ liquidity
premium + maturity risk premium
3 Effective Annual Return (EAR)= EAR=(1+periodic rate)m -1
Periodic rate= stated annual rate/m
M= number of compounding periods per year
4 )9 39 ,< N
)9
39
1+ I
N

Y
)9 IXWXUHYDOXH
39 3UHVHQWYDOXH
I/Y=Rate of return per compounding period
N=Number of compounding periods

5 39SHUSHWXLW\ 307
(I/Y)
307 )L[HGSHULRGLFFDVKIORZ
DISCOUNTED CASH FLOW APPLICATION
6 CF
139 
(1+r)t
&) ([SHFWHGFDVKIORZ
r =Discount rate
7 IRR
CF1 CF2 CF3
0=CF+ + +
(1+IRR) (1+IRR)2 (1+IRR)3
IRR= Internal rate of return.

8 (QGLQJ9DOXH%HJLQQLQJ9DOXH
HPR=
%HJLQQLQJ9DOXH
HPR= Holding period return

9 RBD= D/F*360/t
RBD= Annualised yield on a bank discount basis
D=Dollar discount= purchase price - face value
F=Face value
t=Number of days until maturity
360=Bank convention of number of days in a year
10 Effective Annual Yield (EAY)= (1+HPY)365/t -1
HPY= Holding period yield
11 RMM= 360/days*HPY
RMM=Money market yield
12 Bond equivalent yield= {(1+ effective annual yield)1/2-1} * 2
Geometric Mean= [(1+R1)(1+R2). (1+Rn)]1/n-1
13
Geometric mean return is also known as compound annual rate of return
N
14 Harmonic Mean=
[
15 Position of observation at a given percentile
y
Ly=(n+1)
100
16 5DQJH 0D[LPXP9DOXH0LQLPXP9DOXH
;L;
17 Mean Absolute Deviation (MAD)=
n
; $ULWKPHWLFPHDQ
18 3RSXODWLRQ9DULDQFH
((Xi-)2)
2 =
N
19 Standard Deviation
= square root of variance
20 6DPSOH9DULDQFH
((Xi-)2)
2 =
N-1
21 Chebyshevs Inequality
Percentage of observations that lie within k standard deviations of the mean is at least= 1-1/k2
22 &RHIILFLHQWRI9DULDWLRQ
VWDQGDUGGHYLDWLRQRI[
&9 
DYHUDJHYDOXHRI[
23 (Rp-RFR)
Sharpe Ratio=
p
Rp= Portfolio Return
RFR= Risk Free Rate
p= standard deviation of portfolio return
24 ;L[ 3)
Sample Skewness (Sk) =
S3
s =sample standard deviation

 ;L[ 4)
25 Sample Skewness (Sk) =
S4

26 ([FHVV.XUWRVLV 6DPSOH.XUWRVLV
PROBABILITY CONCEPTS
27 Multiplication Rule Of Probability,
P(AB)=P(A/B)*P(B)
28 Addition Rule Of Probability,
P(A or B)= P(A)+P(B)-P(AB)
29 Total Probability Rule (Used to determine unconditional probability of an event)
P(A)=P(A/B1)P(B1)+P(A/B2)P(B2)++P(A/BN)P(BN)
30 ([SHFWHGYDOXHRIUDQGRPYDULDEOH ZHLJKWHGDYHUDJHRISRVVLEOHRXWFRPHV
Weights = probabilities that the outcome will occur
31 Covariance
Cov(Ri, Rj)= E{[Ri-E(Ri)][(Rj-E(Rj)]}
Cov(Ri, Rj)= Corr(Ri, Rj) (Ri)(Rj)
32 Correlation Cofficient
(Cov(Ri,Rj))
Corr(Ri,Rj)=
((Ri)(Rj))

33 Weight of asset in portfolio,


w= market value of investment in asset i/market value of the portfolio

34 3RUWIROLR([SHFWHG9DOXH
E(Rp)=w1E(R1) + w2E(R2)+ wnE(Rn)
35 9DULDQFHRI$VVHW3RUWIROLR

36 9DULDQFHRIDVVHW3RUWIROLR

37 Bayes Formula,
Updated Probability=( Probability of new information for a given event / unconditional
probability of new event )*(prior probability of event)
38 Factorial
n! = n*(n-1)*(n-2)*(n-3) *1
0!=1
39 Labelling,
n! / (n1!)*(n2!)*. ( nn!)
40 Combination,
n Cr=n! /(n-r)!r!
41 Permutation,
n! /(n-r)!
COMMON PROBABILITY DISTRIBUTIONS

42 To standardize a normal variable,


(Observation - Population Mean)
z=
(Standard Deviation)
43 Roys safety first criteria,
([E(Rp)-Rl])
SFR=
( p)
**Choose the portfolio with largest SFR
44 Continuously compounded rate of return,
Rcc=ln(1+HPR)

SAMPLING AND ESTIMATION


45 Standard Error of sample Mean,
[ Q
= Standard deviation of population
n=Size of the sample
46 t-distribution to construct a confidence interval,
When variance is unknown,
[ W/2 VQ

When variance is known,


[ W/2*Q
[ 3RLQWHVWLPDWHRISRSXODWLRQPHDQ
t/2=The t-reliability factor
VQ 6WDQGDUGHUURURIVDPSOHPHDQ
SAMPLING AND ESTIMATION
47 (Sample Mean - Hypothesized Mean)
Test Statistic=
(Standard Error of Sample Mean)

48 t-statistic
When population variance is unknown,
(x-)
Tn-1=
(s/n)
When population variance is known,
(x-)
Tn-1=
(/n)
49 (n-1)s2
Chi-square test: X2=
2
50 F-distribution test,
F=s12/s22
TECHNICAL ANALYSIS
51 $UPV,QGH[RU6KRUW7HUP7UDGLQJ,QGH[
(Number of advancing Issues / Number of declining issues)
TRIN=
9ROXPHRIDGYDQFLQJLVVXHV9ROXPHRIGHFOLQLQJLVVXHV
DEMAND AND SUPPLY ANALYSIS: INTRODUCTION

52 'HPDQGIXQFWLRQIRUJRRG;
4G[ I 3[,3\
3[ 3ULFHRIJRRG;, 6RPHPHDVXUHRIDYHUDJHLQFRPHSHU\HDU
Py=Prices of related goods
53 3ULFH(ODVWLFLW\RI'HPDQG 4XDQWLW\'HPDQGHG3ULFH
FKDQJH

54 &URVV3ULFH(ODVWLFLW\ 4XDQWLW\'HPDQGHG3ULFH2I5HODWHG*RRGV
FKDQJH

55 ,QFRPH(ODVWLFLW\ 4XDQWLW\'HPDQGHGLQ,QFRPH
FKDQJH
DEMAND AND SUPPLY ANALYSIS: THE FIRM

56 Accounting profit=total revenue-total accounting costs

57 Economic profit=accounting profit-implicit opportunity costs


Or
Economic profit=total revenue-total economic costs
58 Normal profit,
Economic profit=accounting profit-normal profit=0
Normal profit is the accounting profit that makes economic profit equal to zero

59 Marginal Cost,
MC=change in total cost/change in output
AGGREGATE OUTPUT, PRICES AND ECONOMIC GROWTH

60 1RPLQDO*'3 3LW4LW
Pi,t= Price of good i in year t. Qi,t=Quantity of good I produced in year t
61 GDP deflator= (nominal GDP/value of year t output at year t)*100

62 Per Capita Real GDP= GDP/population


63 *'3E\H[SHQGLWXUHDSSURDFK
*'3 &,* ;0
& &RQVXPSWLRQVSHQGLQJ, %XVLQHVVLQYHVWPHQW* *RYHUQPHQWSXUFKDVHV; ([SRUWV
M=Imports
64 GDP by Income Approach,
GDP=national income+ capital consumption allowance+ statistical discrepancy
65 National Income= compensation of employees (wages and benefits)
FRUSRUDWHDQGJRYHUQPHQWHQWHUSULVHSURILWVEHIRUHWD[HV
+Interest Income
+Unincorporated business net income (business owners income)
+rent
LQGLUHFWEXVLQHVVWD[HVVXEVLGLHV
66 Personal Income= national Income
+transfer payments to households
LQGLUHFWEXVLQHVVWD[HV
FRUSRUDWHLQFRPHWD[HV
-undistributed corporate profits
67 3HUVRQDOGLVSRVDEOHLQFRPH SHUVRQDOLQFRPHSHUVRQDOWD[HV
68 Quantity Theory Of Money,
09 3<
M=Money Supply,
9 9HORFLW\RIPRQH\LQWUDQVDFWLRQV
P=Price level
Y=Real GDP
69 Recessionary Gap or Output Gap=Real GDP-Full Employment GDP
70 Potential GDP=aggregate hours worked*labour productivity
In terms of economic growth,
Growth in potential GDP=growth in labour force+ growth in labour productivity
71 Production Function,
< $ I /.
Y=Aggregate economic output,
L=Size of labour force,
. $PRXQWRIFDSLWDODYDLODEOH
A=Total factor productivity
UNDERSTANDING BUSINESS CYCLES
72 CPI= (Cost of basket at current prices/cost of basket at base period prices)*100
73 Total amount of money that can be created,
Money created= new deposit/reserve requirement
74 Money Multiplier=1/Reserve Requirement
75 Fisher Effect,
Rnom=Rreal+E(I)+RP
Rnom=Nominal interest rate,
Rreal=Real Interest rate
RP=Risk premium for uncertainty
76 Neutral Interest Rate= Real trend rate of economic growth + inflation target
77 Fiscal Multiplier= 1/[1-MPC(1-t)]
78 Relation between trade deficit, saving and domestic investment,
([SRUWVLPSRUWV SULYDWHVDYLQJVJRYHUQPHQWVDYLQJVGRPHVWLFLQYHVWPHQW

CURRENCY EXCHANGE RATES

79 5HDO([FKDQJH5DWH 1RPLQDO([FKDQJH5DWH GI


(CPI foreign)
(CPI domestic)
80 Interest Rate Parity,

foward (1+interest rate (domestic)


=
spot (1+interest rate (foreign)
FINANCIAL STATEMENT ANALYSIS: AN INTRODUCTION

81 Accounting Equation, (Balance Sheet)


Assets= liabilities + equity
Assets=liabilities+ contributed capital+ ending retained earnings
$VVHWV OLDELOLWLHVFRQWULEXWHGFDSLWDOEHJLQQLQJUHWDLQHGHDUQLQJVUHYHQXHH[SHQV-
es-dividends

82 Income statement equation,


1HWLQFRPH UHYHQXHVH[SHQVHV

83 (cost-residual value)
6WUDLJKWOLQHGHSUHFLDWLRQH[SHQVH
(useful life)

84 Accelerated depreciation- double declining balance method

DDB depreciation= 2 (cost-accumulated depreciation)


useful life

85 (net income-preferred dividends)


Basic EPS=
(weighted average number of common shares outstanding)

86 (Adjusted income for common shareholders)


Diluted EPS=
(weighted average commom and potential common shares outstanding)
Diluted EPS=
([Net income-preferred dividends]+[convertible preferred dividends]
>FRQYHUWLEOHGHEWLQWHUHVW@ WD[UDWH
([Weighted average shares]+[shares from conversion of converted preferred shares]
+[shares from conversion of debt]+[shares issuable from stock options])

UNDERSTANDING CASHFLOW STATEMENTS

87 Free Cash flow to firm,


)&)) 1,1&&,QWHUHVW 7D[5DWH )&,QY:&,QY
)&)) &)2,QWHUHVW 7D[5DWH )&,QY
NI= Net income
NCC= Non cash charges
)&,QY )L[HGFDSLWDOLQYHVWPHQW
WC Inv= Working Capital Investment

88 Free cash flow to equity,


FCFE=CFO-FC Inv + net borrowing
Net borrowing= debt issued- debt repaid
89 Performance Ratio:
Cash flow to revenue= CFO/Net Revenue
CFO= Cash flow from operations
90 Performance Ratio:
Cash return on asset ratio= CFO/Average total assets
91 Performance Ratio:
Cash return on equity ratio=CFO/Average total equity
92 Performance Ratio:
Cash to income ratio: CFO/Operating Income
93 (CFO-Preferred Dividends)
Cash flow per share=
(Weighted Average Number Of Common Shares)
94 Coverage Ratio:
CFO
Debt coverage=
(Total Debt)
95 Coverage Ratio:
&)2LQWHUHVWSDLGWD[HVSDLG
Interest coverage ratio:
(interest paid)
If interest paid is classified as a financing activity under ifrs, no interest adjustment is necessary

96 CFO
Reinvestment Ratio=
(Cash paid for long term assets)

97 CFCFO
Debt payment Ratio=
(Cash long term debt repayment)

98 CFO
Dividend Payment Ratio=
(Dividends paid)

99 CFO
Investing and Financing Ratio=
(Cash outflow from investing and financing activities)

FINANCIAL ANALYSIS TECHNIQUES

ACTIVITY RATIOS:
100 Receivables Turnover=net annual sales /average receivables

101 365
Days of sales outstanding=
(Receivables turnover)

102 (Cost of goods sold)


Inventory Turnover=
(Average inventory)

103 365
Days of inventory in hand=
(Inventory turnover)
104 Purchases
Payables turnover=
(Average trade payables)
105 365
Number of days of payables=
(Payable turnover)
106 (Revenue )
Total asset turnover=
(Average total assets)
107 Revenue
)L[HGDVVHWWXUQRYHU
$YHUDJHQHWIL[HGDVVHWV
108 Revenue
Working capital turnover=
(Average working capital)

LIQUIDITY RATIOS

109 (Current Assets)


Current Ratios=
(Current Liabilities)
110 (Cash+Marketable Securities+Receivables)
Quick Ratio=
(Current Liabilities)
111 (Cash+Marketable Securities)
Cash Ratio=
(Current Liabilities)
112 (Cash+Marketable Securities+Receivables)
Defensive Interval=
$YHUDJH'DLO\([SHQGLWXUHV
113 Cash Conversion Cycle= (Days sales outstanding)+(days on inventory on hand)-(number of
days of payables)

SOLVENCY RATIOS

114 (Total debt)


Debt to equity ratio=
(Total Shareholders Equity)
115 (Total debt)
Debt To Capital=
(Total Debt+Total Shareholders Equity)
116 (Total Debt)
Debt To Assets=
(Total Assets)

117 (Average Total Assets)


Financial Leverage=
(Average Total Equity)

118 (DUQLQJV%HIRUH,QWHUHVWDQGWD[HV
Interest Coverage Ratio=
(Interest payments)

119 (DUQLQJV%HIRUH,QWHUHVW 7D[HV/HDVH3D\PHQWV


)L[HG&KDUJH&RYHUDJH 
(Interest payments+Lease payments)
PROFITABILITY RATIOS

120 (Net Income)


Net profit margin=
Revenue
1HWLQFRPH HDUQLQJVDIWHUWD[HVEXWEHIRUHGLYLGHQGV
121 (Gross profit)
Gross Profit Margin=
Revenue
Gross profit= Net Sales- COGS

122 (Operating Income (EBIT))


Operating profit margin=
Revenue

123 EBT
3UHWD[PDUJLQ
Revenue
124 (Net Income)
Return on assets (ROA)=
(Average Total Assets)
125 (Operating Income)
Operating return on assets=
(Average Total Assets)
126 EBIT
Return on Total Capital=
(Average Total Capital)
127 (Net Income)
Return On Equity=
(Average Total Equity)
Or
(Net Income) Revenue
Return On Equity= *
Revenue Equity
= Net Profit Margin * Equity Turnover

Return On Equity By Du Pont Equation,


(Net Income) (Sales ) (Assets)
Return On Equity= Sales * Assets * Equity
=Net Profit Margin*Asset Turnover*Leverage Ratio

52(%\([WHQGHG'XSRQW(TXDWLRQ
(Net Income) EBT EBIT Revenue (Total Assets )
ROE= * EBIT * Revenue * (Total Assets) * (Total Equity)
EBT
 7D[%XUGHQ ,QWHUHVW%XUGHQ (%,70DUJLQ $VVHWWXUQRYHU ILQDQFLDOOHYHUDJH
128 (Net Income-Preferred Dividends)
Return on common equity=
(Average Common Equity)

129 Sustainable growth rate= RR*ROE


RR= Retention rate
=1-dividend payout
130 (Standard deviation of operating income)
Coefficient of variation sales=
(Mean sales)
131 (Standard deviation of operating income)
&92SHUDWLQJ,QFRPH 
(mean operating income)
132 (Standard deviation of net income)
&91HW,QFRPH 
(Mean net income)
INVENTORIES

133 COGS= beginning inventory + purchases - ending inventory


LONG LIVED ASSETS

134 Depreciation methods,


i) straight line and ii) ddb covered earlier.
Ii) units of production depreciation=
(Original cost-salvage value)
(life in output units) * Output units in the period

INCOME TAXES

135 ,QFRPHWD[H[SHQVH
(IIHFWLYHWD[UDWH 
3UHWD[LQFRPH

136 ,QFRPHWD[H[SHQVH WD[HVSD\DEOH'7/'7$


'7/ 'HIHUUHGWD[OLDELOLW\
'7$ 'HIHUUHGWD[DVVHW
CAPITAL BUDGETING

137 392IIXWXUHFDVKIORZV
3URILWDELOLW\,QGH[ 3, 
CF0
139
=1+
CF0
COST OF CAPITAL

138 :$&&  ZG >NG W @ ZSV NSV  ZFF .FF


Wd= percentage of debt in capital structure.
Wps=percentage of preferred stock in the capital structure.
Wcc=percentage of common stock in the capital structure

139 $IWHUWD[FRVWRIGHEW NG W


140 Cost of preferred stock (kps)
.ps= Dps/p
141 Capital asset pricing model (CAPM)
.FH 5)5[E(Rm)-RFR]
.FH &RVWRIHTXLW\FDSLWDO
RFR= Risk free rate
( 5P ([SHFWHGUHWXUQRQPDUNHW

142 Dividend discount model,


D1
Po= (k-g)
' 1H[W\HDUGLYLGHQG
. 5HTXLUHGUDWHRIUHWXUQRQFRPPRQHTXLW\
J )LUPVH[SHFWHGFRQVWDQWJURZWKUDWH

143 Bond yield plus risk premium approach,


.ce=bond yield + risk premium

144 Asset Beta,


1

Asset=Equity 1+ (1-t)D
E

D/E= Comparable companys debt to equity ratio


145 Project Beta,
Project=Asset (1+(1-t) D )
E

146 Revised CAPM using country risk premium,


.ce=Rf+[E(Rm)-RFR+CRP
CRP= Country risk premium

147 $QQXDOLVHGVWDQGDUGGHYLDWLRQRIHTXLW\LQGH[RIGHYHORSLQJFRXQWU\
CRP=
(Annualised standard deviation of sovereign bond
Market in terms of the developed market currency)
Sovereign yield spread= difference between the yields of government bonds in in the
developing country and treasury bonds of similar maturities

148 Break Point (any time the cost of one of the components of the companys WACC changes.)
(Amount Of Capital at which the components cost of capital changes)
Break Points=
(weight of the he component in the capital structure)
MEASURES OF LEVERAGE

149 Degree of operating leverage,


(Percentage change in EBIT)
DOL=
(Percentage change in sales)
DOL for a particular level of units,
4 39 679&
DOL= =
4 39 ) 679&)
Q= Quantity of units sold
P=Price per unit
9 9DULDEOHFRVWSHUXQLW
) )L[HGFRVWV
S= Sales
79& 7RWDOYDULDEOHFRVWV

150 Degree of financial leverage,


(Percentage change in EPS)
DFL=
(Percentage change in EBIT)
DFL for particular level of operating units,
EBIT
DFL=
(EBIT-Interest)

151 Degree Of Total Leverage


DTL=DOL+DFL
(% change in EBIT) (% change in EPS) (% change in EPS)
DTL=
(% change in Sales) * (% change in EBIT) = (% Change in Sales)

4 39 679&
DTL=
4 39 ), = 679&),

152 Breakeven Quantity Of Sales,


)L[HGSHUDWLQJFRVWV)L[HGILQDQFLQJFRVWV
QBE=
3ULFH9DULDEOHFRVWSHUXQLW
DIVIDENDS AND SHARE REPURCHASE BASICS

153 7RWDOHDUQLQJV$IWHUWD[FRVWRIIXQGV
Eps after buyback=
(Shares outstanding after buyback)
WORKING CAPITAL MANAGEMENT

154 (%discount)
Cost of trade credit=(1+ 365/days past discount -1
(1-%discount)
PORTFOLIO RISK AND RETURN: PART II

155 ([SHFWHGUHWXUQZKHQRQHDVVHWLVLQYHVWHGLQULVN\DVVHWDQGRQHDVVHWLQULVNIUHHDVVHW
E(Rp)= WAE(RA)+wBE(RB)
WB=1-WB
156 Capital market line equation,
(E(Rm)-Rf)
E(Rp)= Rf+ p
( m)
157 Total Risk= systematic risk + unsystematic risk
158 General form of multifactor model,
E(Ri)-Rf=il*E(Factor 1) + i2*E(factor 2)+. ik*E(Factor k)
159 Equation of SML,
(E(Rm)-RFR)
E(Ri)=RFR+ (Cov i,mkt)
9DULDQFHRI0DUNHW
160 (Std Dev of m)  5P5I
M Square= (Rp-Rf)
(Std Dev of p)
161 (Rp-Rf)
Treynor Measure=
p
162 Jensons Alpha= p=Rp-[Rf+p(Rm-Rf)]

MARKET ORGANISATION AND STRUCTURE


163 ((1-initial margin))
Margin call price= Po
((1-maintenance margin))
Po= initial purchase price
SECURITY MARKET INDICES

164 Compounded Returns,


Rp= (1+R1)(1+R2)(1+R3). (1+Rk)-1
. ODVWVXESHULRG

165 (Sum of stock prices)


3ULFHZHLJKWHG,QGH[
1XPEHURIVWRFNVLQLQGH[DGMXVWHGIRUVSOLWV
0DUNHWZHLJKWHG,QGH[
166
&XUUHQWWRWDOPDUNHWYDOXHRILQGH[VWRFNV
&XUUHQWLQGH[YDOXH  %DVH\HDULQGH[YDOXH
%DVH\HDUWRWDOPDUNHWYDOXHRILQGH[VWRFNV
167 (TXDOZHLJKWLQJLQGH[
1HZLQGH[YDOXH ,QLWLDOLQGH[YDOXH &KDQJHLQLQGH[
EQUITY VALUATION: CONCEPTS AND BASIC TOOLS

168 Dividend discount model,


One year holding period:
Dt (Year End Price)
9R +
((1+ke) ) ((1+ke))
9R &XUUHQWVWRFNYDOXH
Dt=Dividend at time t
.H 5HTXLUHGUDWHRIUHWXUQ

Two year holding period DDM,


D1 D2 P2
9DOXH + +
((1+ke) ) (1+ke)2 ((1+ke)2)

Multi-stage dividend discount model:


D1/ D2 Dn Pn
9DOXH + + +
(1+ke) ) (1+ke)2 ((1+ke)n ) ((1+ke)n)

(Dn+1)
Pn=
.HJF

169 Free cash to equity,

)&)( QHWLQFRPHGHSUHFLDWLRQLQFUHDVHLQZRUNLQJFDSLWDOIL[HGFDSLWDOLQYHVWPHQWGHEW
principal repayments+ new debt issues

FCFE=CFO-FC investment + net borrowing


CFO= Cash flow from operations.

170 Dp
Preferred stock value=
kp
'S )L[HGGLYLGHQG
.S 5HTXLUHGUDWHRIUHWXUQ

171 (QWHUSULVH9DOXH (9
(9 PDUNHWYDOXHRIFRPPRQDQGSUHIHUUHGVWRFNPDUNHWYDOXHRIGHEWFDVKDQGVKRUW
term investment

172 (Market price per share)


Trailing P/E=
(EPS over previous 12 months)

173 (Market price per share)


Leading P/E=
)RUHFDVW(36RYHUQH[WPRQWKV

174 (Market value of equity) (Market price per share)


P/B Ratio= =
(Book value of equity) (Book value per share)
Book value of equity= common shareholders equity = (total assets- total liabilities)-pre-
ferred stock
175 (Market value of equity)
P/S Ratio=
(Total sales)

176 (Market value of equity)


P/CF Ratio
(Cash flow)

INTRODUCTION TO FIXED INCOME VALUATION

177 Price of annual coupon bond,


Coupon Coupon (Principal+ Coupon)
Price= + + +
((1+YTM)) ((1+YTM)2) ((1+YTM)n)
YTM= Yield to maturity

Price of semi-annual coupon bond,


Coupon Coupon Principal+ Coupon
YTM YTM YTM n*2
Price= 1+ 1+ 2 + + 1+
2 2 2

178 Full Price= Flat price + Accrued interest

179 (Annual cash coupon payment)


Current Yield=
(Bond price)

180 Relation between forward rates and spot rates,

(1+s2)=(1+S1)(1+1y1y)

181 2SWLRQ9DOXH ]VSUHDG2$6


UNDERSTANDING FIXED INCOME RISK AND RETURN

182 Modified duration,


For annual pay bond:
Modified duration= Macualay duration/ (1+YTM)
For semi-annual bond,
ModDursemi=MacDur/(1+ YTM/2 )
9B SULFHLQFUHDVH
9 SULFHGHFUHDVH
9 FXUUHQWSULFH
9B9
$SSUR[LPDWHPRGLILHGGXUDWLRQ 
92\WP
183 $SSUR[LPDWHFKDQJHLQERQGSULFH 0RG'XU <70

184 9B9
Effective duration=
9R&XUYH
185 Portfolio duration= W1D1 + W2D2 + +WnDn
W= Weight= Full price/total value
D=Duration on bond

186 Money duration= annual modified duration *full price of bond position

Money Duration per 100 units of par value= annual modified duration * full price per 100 of
par value

187 3ULFHYDOXHRIDEDVLVSRLQW 39%3 $YHUDJHRIGHFUHDVHLQYDOXHRIERQGZKHQ<70


increases and increase in value of bond when YTM decreases

188 $SSUR[LPDWH&RQYH[LW\ 9B9+9o / FXUYH 29R

189 FKDQJHLQ%RQG3ULFH ZKHQGXUDWLRQDQGFRQYH[LW\DUHJLYHQ

%RQG9DOXH GXUDWLRQ VSUHDG FRQYH[LW\ VSUHDG 

190 Duration Gap= Macaulay duration-Investment horizon


191 Return impact (%change in bond price)

For small spread changes,


5HWXUQLPSDFW0RGLILHGGXUDWLRQ 6SUHDG

For larger spread changes,


5HWXUQLPSDFW0RGLILHGGXUDWLRQ 6SUHDGFRQYH[LW\ VSUHDG 

192 Yield spread = liquidity premium + credit spread

193 Payment to the long at settlement,


days
(floating-foward)
360
(notional principal)
days
1+[(floating)
360
Days= number of days in the loan term

194 Intrinsic value of call option,

& PD[>6;@
& ,QWULQVLF9DOXHRI&DOORSWLRQ
S= Spot price
; 6WULNHSULFH

195 Intrinsic value of a put option,

3 PD[>;6@
P=intrinsic value of put
196 Option value= intrinsic value+ time value

197 Put-call parity:


&; 5)5 W 63
C= Call
P=Put
S=Stock
; 3UHVHQWYDOXH

198 Put call parity with assets cashflows,


&; 5)5 W 6R39FI 3

199 Plain vanilla interest rate swap,


((Number of days) notional principal
1HWIL[HGUDWHSD\PHQW W  6ZDSUDWH/,%25W
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