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Questions and Answers
What is the present value of $100 expected two years from today at a discount rate of 6%?
What is the present value of $100 expected two years from today at a discount rate of 6%?
- $89.00
- $106.00
- $112.36 (correct)
- $100.00
What is present value defined as?
What is present value defined as?
- Future cash flows multiplied by the factor (1 + r)^t
- Present cash flows compounded into the future
- Inverse of future cash flows
- Future cash flows discounted to the present by an appropriate discount rate (correct)
If the annual interest rate is 12.00%, what is the two-year discount factor?
If the annual interest rate is 12.00%, what is the two-year discount factor?
- 0.7972 (correct)
- 0.8065
- 0.8929
- 1.2544
If the present value of cash flow X is $240, and the present value of cash flow Y is $160, then the present value of the combined cash flows is:
If the present value of cash flow X is $240, and the present value of cash flow Y is $160, then the present value of the combined cash flows is:
The rate of return is also called the:
The rate of return is also called the:
What is used as a measure of a bond’s interest rate risk or sensitivity to a change in its yield?
What is used as a measure of a bond’s interest rate risk or sensitivity to a change in its yield?
How is modified duration (ModDur) calculated?
How is modified duration (ModDur) calculated?
When is a bond sold at a premium?
When is a bond sold at a premium?
How is Macaulay duration (MacDur) calculated?
How is Macaulay duration (MacDur) calculated?
What does a bond's annual Macaulay duration represent?
What does a bond's annual Macaulay duration represent?
What is used as a measure of a bond’s interest rate risk or sensitivity to a change in its yield?
What is used as a measure of a bond’s interest rate risk or sensitivity to a change in its yield?
How is modified duration (ModDur) calculated?
How is modified duration (ModDur) calculated?
When is a bond sold at a premium?
When is a bond sold at a premium?
What does a bond's annual Macaulay duration represent?
What does a bond's annual Macaulay duration represent?
If the present value formula is used to value bonds, what does CR represent when the bond is sold at par?
If the present value formula is used to value bonds, what does CR represent when the bond is sold at par?
Study Notes
Present Value and Discount Rates
- Present value (PV) calculates the worth of future cash flows today, accounting for a specific discount rate.
- PV of $100 expected two years from now at a 6% discount rate is approximately $89.00.
- Present value formula: ( PV = \frac{FV}{(1 + r)^n} ) where ( FV ) is future value, ( r ) is the discount rate, and ( n ) is the time in years.
Discount Factors
- For an annual interest rate of 12.00%, the two-year discount factor is approximately 0.7972.
- Discount factor formula: ( DF = \frac{1}{(1 + r)^n} ).
Combined Present Values
- Present value of cash flow X is $240 and cash flow Y is $160; combined present value becomes $400.
Rate of Return Terminology
- The rate of return is also known as the yield.
Bond Interest Rate Sensitivity
- A bond’s interest rate risk or sensitivity to changes in yield is measured by duration.
- Modified duration (ModDur) indicates the percentage change in price for a 1% change in yield.
Modified Duration Calculation
- Modified duration is calculated as ( \text{MacDur} / (1 + r) ) where MacDur is Macaulay duration.
Premium Bonds
- A bond sells at a premium when the market interest rates are lower than the bond’s coupon rate.
Macaulay Duration
- Macaulay duration (MacDur) is the weighted average time until cash flows are received.
- A bond's annual Macaulay duration represents the time value of cash flows, enabling investors to assess interest rate sensitivity.
Bond Valuation
- In bond valuation at par, CR represents the coupon rate, equalling the market rate.
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Description
Test your knowledge of present value and discounting with this quiz. Answer questions on calculating present value, discount rates, and interest rates.
