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4. Calculating the Yield of a Single-Period Investment Calculating the Yield of an Annuity Yield The Time Value of Money > Yield Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance?campaign_content=book_192_section_60&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=dir ect&utm_source=boundless

5. There are a number of ways to calculate yield, but the most common ones are to calculate the percent change from the initial investment, APR, and APY (or EAR). APR (annual percentage rate) is a commonly used calculation that figures out the nominal amount of interest accrued per year. It does not account for compounding interest. APY (annual percentage yield) is a way of using the nominal interest rate to calculate the effective interest rate per year. It accounts for compounding interest. EAR (effective annual rate) is a special type of APY that uses APR as the nominal interest rate. Calculating the Yield of a Single-Period Investment Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance/textbooks/boundless-finance-textbook/the-time-value-of-money-5/yield-60/calculating-the-yield-of-a-single-period- investment-277- 1864?campaign_content=book_192_section_60&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=boundl ess Percent Change View on Boundless.com The Time Value of Money > Yield

6. The yield of an annuity may be found by discounting to find the PV, and then finding the percentage change from the PV to the FV. The Internal Rate of Return (IRR) is the discount rate at which the NPV of an investment equals 0. The IRR calculates an annualized yield of an annuity. Calculating the Yield of an Annuity Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance/textbooks/boundless-finance-textbook/the-time-value-of-money-5/yield-60/calculating-the-yield-of-an-annuity-278- 7559?campaign_content=book_192_section_60&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=boundl ess IRR Example View on Boundless.com The Time Value of Money > Yield

7. Free to share, print, make copies and changes. Get yours at www.boundless.com Appendix

8. Key terms Effective Interest The amount of interest accrued per year after accounting for compounding. effective-interest method amortizing a debt according to the effective interest rate paid Internal Rate of Return (IRR) The discount rate that will cause the NPV of an investment to equal 0. Net Present Value (NPV) The present value of a project or an investment decision determined by summing the discounted incoming and outgoing future cash flows resulting from the decision. Nominal Interest The amount of interest accrued per year without accounting for compounding. yield In finance, the term yield describes the amount in cash that returns to the owners of a security. Normally it does not include the price variations, at the difference of the total return. Yield applies to various stated rates of return on stocks (common and preferred, and convertible), fixed income instruments (bonds, notes, bills, strips, zero coupon), and some other investment type insurance products Free to share, print, make copies and changes. Get yours at www.boundless.com The Time Value of Money

9. Annual Percentage Yield The Annual Percentage Yield is a way or normalizing the nominal interest rate. Basically, it is a way to account for the time factor in order to get a more accurate number for the actual interest rate.inom is the nominal interest rate.N is the number of compounding periods per year. Free to share, print, make copies and changes. Get yours at www.boundless.com Wikipedia. "Annual percentage yield." GNU FDL http://en.wikipedia.org/wiki/Annual_percentage_yield View on Boundless.comGNU FDLhttp://en.wikipedia.org/wiki/Annual_percentage_yieldView on Boundless.com The Time Value of Money

10. EAR The Effective Annual Rate is the amount of interest actually accrued per year based on the APR. n is the number of compounding periods of APR per year. Free to share, print, make copies and changes. Get yours at www.boundless.com Wikipedia. "Effective APR." GNU FDL http://en.wikipedia.org/wiki/Effective_APR View on Boundless.comGNU FDLhttp://en.wikipedia.org/wiki/Effective_APRView on Boundless.com The Time Value of Money

11. Percent Change The percent change in value is the change in value from PV to FV (V2 to V1) divided by PV (V1) times 100%. Free to share, print, make copies and changes. Get yours at www.boundless.com Wikipedia. "Percentage change." GNU FDL http://en.wikipedia.org/wiki/Percentage_change View on Boundless.comGNU FDLhttp://en.wikipedia.org/wiki/Percentage_changeView on Boundless.com The Time Value of Money

12. IRR Example The setup to find the IRR of the investment with cash flows of -4000, 1200, 1410, 1875, and 1050. By setting NPV = 0 and solving for r, you can find the IRR of this investment. Free to share, print, make copies and changes. Get yours at www.boundless.com Wikipedia. "Internal rate of return." GNU FDL http://en.wikipedia.org/wiki/Internal_rate_of_return View on Boundless.comGNU FDLhttp://en.wikipedia.org/wiki/Internal_rate_of_returnView on Boundless.com The Time Value of Money

13. Free to share, print, make copies and changes. Get yours at www.boundless.com The Time Value of Money Which of the following correctly defines a method of determining a single period investment's yield? A) Change-in-value equals the investment's FV minus its PV. Divide that by PV and multiply by 100%. B) The Effective Annual rate is the interest rate multiplied by the number of payment periods per year. C) Annual Percentage Rate = (1+(i/N))^N - 1. D) All of these answers.

14. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ The Time Value of Money Which of the following correctly defines a method of determining a single period investment's yield? A) Change-in-value equals the investment's FV minus its PV. Divide that by PV and multiply by 100%. B) The Effective Annual rate is the interest rate multiplied by the number of payment periods per year. C) Annual Percentage Rate = (1+(i/N))^N - 1. D) All of these answers.

15. Free to share, print, make copies and changes. Get yours at www.boundless.com The Time Value of Money You purchase a two year annuity for $2800. The annuity pays $1500 each year. What is the annuity's approximate IRR? A) 8.6% B) 2.3% C) 4.5% D) 10%

16. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ The Time Value of Money You purchase a two year annuity for $2800. The annuity pays $1500 each year. What is the annuity's approximate IRR? A) 8.6% B) 2.3% C) 4.5% D) 10%

17. Attribution Wikipedia. "Internal rate of return." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Internal_rate_of_returnCC BY-SA 3.0http://en.wikipedia.org/wiki/Internal_rate_of_return Wikipedia. "Annual percentage rate." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Annual_percentage_rateCC BY-SA 3.0http://en.wikipedia.org/wiki/Annual_percentage_rate Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//accounting/definition/effective-interest-methodCC BY-SA 3.0http://www.boundless.com//accounting/definition/effective-interest-method Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//finance/definition/effective-interestCC BY-SA 3.0http://www.boundless.com//finance/definition/effective-interest Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//finance/definition/nominal-interestCC BY-SA 3.0http://www.boundless.com//finance/definition/nominal-interest Wikipedia. "Annual percentage yield." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Annual_percentage_yieldCC BY-SA 3.0http://en.wikipedia.org/wiki/Annual_percentage_yield Wikipedia. "Yield (finance)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Yield_(finance)CC BY-SA 3.0http://en.wikipedia.org/wiki/Yield_(finance) Wikipedia. "Annuity (finance theory)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Annuity_(finance_theory)CC BY-SA 3.0http://en.wikipedia.org/wiki/Annuity_(finance_theory) Wikipedia. "Annuity (finance theory)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Annuity_(finance_theory)CC BY-SA 3.0http://en.wikipedia.org/wiki/Annuity_(finance_theory) Wikipedia. "Internal rate of return." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Internal_rate_of_returnCC BY-SA 3.0http://en.wikipedia.org/wiki/Internal_rate_of_return Wiktionary. "yield." CC BY-SA 3.0 http://en.wiktionary.org/wiki/yieldCC BY-SA 3.0http://en.wiktionary.org/wiki/yield Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//finance/definition/net-present-value-npvCC BY-SA 3.0http://www.boundless.com//finance/definition/net-present-value-npv Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//finance/definition/internal-rate-of-return-irrCC BY-SA 3.0http://www.boundless.com//finance/definition/internal-rate-of-return-irr Free to share, print, make copies and changes. Get yours at www.boundless.com The Time Value of Money