1. Chapter 7 Time Value of Money
Presentation
Chapter 7 Time Value of Money

2. Single Payment Note
A loan repayable with interest at a specified time and maturity, often within 30 to 90 days. FV = PV*(1+$TV)^N Where FV = the amount owed at maturity. PV = the amount of the loan, $TV = the annual rate of interest. N = the number of periods.

3. Single Payment Note
FV = PV*(1+$TV)^N Loan Amount Rate 10.0% Days of Loan 75 Days in Year 365 Periods Rate Loan Due Data % Solution

4. Steady Payment Loan
A loan with a series of equal cash payments at the end of successive periods of equal duration. Formula for the payment: PMT = PV*$TV/(1-(1+$TV)^-N)

5. Steady Payment Loan
Loan 500 Periods of Loan 24 Periods in Year 4 Annual Rate 14% Periods Rate Loan Payment Data % 500 Solution 40 PMT = PV*$TV/(1-(1+$TV)^-N)

6. Amortization Schedule
A listing over time of all payments, interest amounts, principal reductions, and ending balances for a loan. If the ending balance is zero, the loan is fully amortized over the period.

7. Amortization Schedule
Amount of Loan 250 Pd 1 Pd 2 Pd 3 Pd 4 Interest rates: 15.0% 13.0% 11.0% 16.0% Starting Balance Periods Remaining Rate 15.0% 13.0% 11.0% 16.0% Payment Interest Portion Principal Portion End Balance

8. Chapter 8 Risk and Required Return
Presentation
Chapter 8 Risk and Required Return

9. Capital Asset Pricing Model (CAPM)
A theoretical framework for explaining the relationship between risk and return.
Risk, Two definitions:
Actual return will be less than the expected return.
Variability of return from the investment.

10. Standard Deviation (σ)
A measure of the dispersion of returns in a normal probability distribution.
Particularly useful because:
6σ = Virtually the entire range.
4σ = two-thirds of the range.

11. Capital Asset Theory
A powerful model of the relationships between risk with return. A high-risk proposal must offer a higher forecasted return than a lower-risk proposal.

12. What is “Return?”
CAPM uses two independent analyses of return. Likely Return. The probable or expected return from the investment. Required Return. How much return is needed given the risk level.

13. The Market Line – Must Have

14. The Market Line with Inefficiencies.

15. Indifference Curve – Required Return
The trade-off between risk and return.

16. Optimal Investment

17. Optimal Investment -- Want theory?
Using (σ) as the risk measure, required return is calculated:
E(Rtn)req = E(Rtn)riskfree + [Exc(Rtn)mkt]*[ σasset/σmkt]
where
Exc(Rtn)mkt is the excess return on the market portfolio is calculated by subtracting the risk-free return from the market return.