Finance Formulas: Investment, Stock, Bond, and Portfolio Returns

If a question asks about investment performance, what formula should you think of first?

Return formula.

If a question asks about future growth over time, what formula should you use?

Future value formula.

If a question asks about inflation-adjusted growth, what formula should you use?

Real return formula.

If a question asks about stock profitability per share, what formula should you use?

EPS formula.

If a question asks about bond interest income, what formula should you use?

Coupon formula.

What is the general investment return formula?

Return = (Ending Value + Income - Beginning Value)/(Beginning Value)

What does "income" mean in the return formula?

Dividends or interest received.

What is the denominator in the return formula?

Beginning/original investment.

If return = 0.12, what percent return is that?

12%.

What is the stock return formula?

Stock Return = (Price Change + Dividends)/(Beginning Price)

What is price change in stock return?

Ending price − beginning price.

Why must dividends be included in stock return?

They are part of the total return.

What is portfolio return used for?

Combined return of multiple investments.

What is the portfolio return formula?

Portfolio Return = (Total Gain)/(Total Beginning Value)

What is EPS?

Earnings per share.

What is the EPS formula?

EPS = (Net Income - Preferred Dividends)/(Shares)

What does EPS measure?

Profit available per common share.

What is DPS?

Dividends per share.

What is the DPS formula?

DPS = (Dividends)/(Shares)

What is dividend yield?

Dividend income relative to stock price.

What is the dividend yield formula?

Dividend Yield = (DPS)/(Stock Price)

What is payout ratio?

Percent of earnings paid as dividends.

What is the payout ratio formula?

Payout Ratio = (Dividends)/(Earnings)

What is a coupon payment?

Annual interest paid by a bond.

What is the coupon formula?

Coupon = Face Value x Coupon Rate

What is the current yield?

Coupon income divided by current bond price.

What is the current yield formula?

Current Yield = (Coupon)/(Bond Price)

What is a spread in bonds?

Difference in yields between two bonds.

What is the spread formula?

Spread = Yield_A - Yield_B

What is 1 basis point?

0.01%.

What is 100 basis points?

1%.

What is future value?

Amount money grows to over time.

What is the future value formula?

FV = PV(1+r)^n

What does PV stand for in the future value formula?

Present value.

What does r stand for in the future value formula?

Interest/growth rate.

What does n stand for in the future value formula?

Number of periods/years.

When do you use future value?

Investment growth or inflation over time.

What formula estimates money needed at retirement for annual withdrawals?

Present value of annuity formula.

What is the retirement PV formula?

PV = PMT[{1-(1+r)^-n}/{r}]

What does PMT mean?

Annual payment/withdrawal amount.

What formula finds yearly savings needed to hit a future goal?

Future value annuity payment formula.

What is the savings formula?

PMT = [FV x r]/[(1+r)^n-1]

What is nominal return?

Stated return before inflation.

What is real return?

Return after inflation.

What is the approximate real return formula?

Real Return ≈ Nominal Return - Inflation

What is the exact real return formula?

Real Return = (1 + Nominal)/(1 + Inflation) -1