Level 1 Chartered Financial Analyst (CFA ®): Time value of Money (TVM), Part 1

Session 2, Reading 6 (Part 1): An interest rate can be a required rate of return (aka, hurdle rate), a discount rate, and/or an opportunity cost. We can deconstruct an interest into its components where the rate, r = real risk-free interest rate + inflation premium + default risk premium + liquidity premium + maturity premium. The nominal rate = real risk-free rate + inflation premium. The future value, FV(N) = PV*(1 + r_s/m)^(m*N) where r_s is the stated (aka, nominal) rate and m is the number of compound periods per year. If we increase m, beyond monthly and daily, to its limit, m converges on infinity (m = ∞) and we are compounding continuously in which case FV = PV*exp(r*N). The stated (aka, nominal) interest rate is not the effective rate: for a given stated interest rate, r_s, the future value increases with higher compound frequencies. To compare rates, we should use the effective annual rate (EAR). EAR = (1 + periodic rate)^m - 1, where the periodic rate equals the stated rate divided by m; i.e., periodic rate = r_s/m. Therefore, EAR = (1 + r_s/m)^m - 1. For example, if the stated rate is 8.0% per annum, then if m = 2 (i.e. semiannual compound frequency), the EAR = (1 + 0.080/2)^2 - 1 = 8.160%; and if m = 12 (i.e., monthly compound frequency), the EAR = (1 + 0.080/12)^12 = 8.300%. 💡 Discuss this video here in our forum: https://trtl.bz/2X4YthL. 👉 Subscribe here    / bionicturtl.  . to be notified of future tutorials on expert finance and data science, including the Financial Risk Manager (FRM), the Chartered Financial Analyst (CFA), and R Programming! ❓ If you have questions or want to discuss this video further, please visit our support forum (which has over 50,000 members) located at http://bionicturtle.com/forum 🐢 You can also register as a member of our site (for free!) at https://www.bionicturtle.com/register/ 📧 Our email contact is [email protected] (I can also be personally reached at [email protected]) Chartered Financial Analyst (CFA) Level 1 Volume 1    • Level 1 Chartered Financial Analyst (CFA ®...   For other videos in our Financial Risk Manager (FRM) series, see one of the following playlists: Texas Instruments BA II+ Calculator    • Texas Instruments BA II+ Calculator   Risk Foundations (FRM Topic 1)    • Risk Foundations (FRM Topic 1)   Quantitative Analysis (FRM Topic 2)    • Quantitative Analysis (FRM Topic 2)   Financial Markets and Products: Intro to Derivatives (FRM Topic 3, Hull Ch 1-7)    • Financial Markets and Products: Intro to D...   Financial Markets and Products: Option Trading Strategies (FRM Topic 3, Hull Ch 10-12)    • Financial Markets and Products: Option Tra...   FM&P: Intro to Derivatives: Exotic options (FRM Topic 3)    • FM&P: Intro to Derivatives: Exotic options...   Valuation and RIsk Models (FRM Topic 4)    • Valuation and RIsk Models (FRM Topic 4)   Please note: CFA Institute does not endorse, promote or warrant the accuracy or quality of Bionic Turtle. CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute. License agreements for images used: The images used in this video were either purchased under a royalty-free license at 123rf.com (see https://www.123rf.com/license.php?typ...) or were free (or purchased) at canva.com (https://about.canva.com/license-agree...) #bionicturtle #finance #charteredfinancialanalyst #CFA #finance #expertfinance