Finance Concepts and Models - formulas flashcards

These flashcards cover key financial concepts and models that were discussed over multiple weeks.

Compounding Frequency

The number of times interest is calculated or paid on an investment over a specific period. Formula: A = P(1 + \frac{r}{n})^{nt} where n is the compounding frequency.

Net Present Value (NPV)

The difference between the present value of cash inflows and outflows over a period of time. Formula: NPV = \sum{t=1}^{T} \frac{CFt}{(1+r)^t} - C_0

Coupon Bond

A bond that pays fixed interest at regular intervals until maturity. Price Formula: P = \sum_{t=1}^{T} \frac{C}{(1+i)^t} + \frac{F}{(1+i)^T}

Zero-Coupon Bond

A bond that does not pay interest but is sold at a discount to its face value. Price Formula: P = \frac{F}{(1+r)^T}

Yield to Maturity (YTM)

The total return anticipated on a bond if it is held until it matures. Formula (solved for r): P = \sum_{t=1}^{n} \frac{C}{(1+r)^t} + \frac{F}{(1+r)^n}

Gordon Growth Model

A method for valuing a stock by assuming constant growth in dividends. Formula: P = \frac{D1}{r - g} or P = \frac{D0 (1+g)}{r - g}

Expected Return (E(r))

The anticipated return on an investment based on historical data and risk. Probability weighted formula: E(R) = \sum{i=1}^{n} pi r_i

Utility Maximization

A concept where consumers allocate their resources to maximize their satisfaction. Optimality condition: \frac{MUx}{Px} = \frac{MUy}{Py}

Sharpe Ratio

A measure of risk-adjusted return, indicating how much excess return is received for the extra volatility endured. Formula: S = \frac{Rp - Rf}{\sigma_p}

Abnormal Return

The difference between the actual return of an asset and the expected return based on market performance. Formula: ARi = Ri - E[R_i]