CFA Level 1 - Quantitative Methods
Default Risk - ANSWER-Risk that a borrower will not make promised payments
Liquidity Risk - ANSWER-Risk of recieving less than fair value for an investment if it must be sold for cash
quickly
Required Interest Rate on A Security - ANSWER-= Nominal Interest Rate
+ Default Risk Premium
+ Liquidity Premium
+ Maturity Risk Premium
Real Risk Free Rate / Nominal Risk Free Rate - ANSWER-- Single period interest rate for a completely risk-
free security with no inflation added
- Nominal = Real Risk Free Rate + Expected Inflation Rate
Required Rate of Return - ANSWER-Required Rate of Return for an investor to willingly invest
Discount Rate - ANSWER-Used interchangeably with interest rates, especially in use of discounting cash
flows
Opportunity Cost - ANSWER-The gain that is missed by not investing in a particular investment
Effective Annual Rate - ANSWER-The actualy rate of interst that is actually being earned after
compounding more than annually
Continuous Compounding - ANSWER-1. Multiply rate by time
2. Multiple answer by e (Second LN)
, 3. Multiply by PV
Present Value of Perpetuity - ANSWER-Financial instrument that pays a fixed amount of money at set
intervals over an infinite period of time
Present Value of a Projected Perpetuity - ANSWER-1. Calculate PV of Perpetuity
2. Find present value of (N -1)
PV of Uneven Cash Flows - ANSWER-1. Clear Memory
2. Enter 0 in CF0
3. Enter Cash Flows in Sequence
4. NPV = Discount Rate
5. ComputeT NPV
FV of Uneven Cash Flows - ANSWER-1. Calculate the FV of each individual Cash Flow
2: Then add the results together
Calculating the Growth Rate - ANSWER-Or use TMV calculator
1. N = Periods, PV = PV, PMT = 0, FV = FV
2. Compute I/Y
Annual Payments (Amortization) - ANSWER-1. N = Years, I/Y = Interest, PV = Loan Amount, FV = 0
2. Compute Payments
Calculate Amortization Schedule - ANSWER-1. Calculate Loan Payment
2. Calculate Interest Component (Beginning balance x I/Y)
3. Calculate Principal component (Payment - Interest Component)
4.The following beginning balance is the first period balance - principal component only. (Interest goes to
bank)
Default Risk - ANSWER-Risk that a borrower will not make promised payments
Liquidity Risk - ANSWER-Risk of recieving less than fair value for an investment if it must be sold for cash
quickly
Required Interest Rate on A Security - ANSWER-= Nominal Interest Rate
+ Default Risk Premium
+ Liquidity Premium
+ Maturity Risk Premium
Real Risk Free Rate / Nominal Risk Free Rate - ANSWER-- Single period interest rate for a completely risk-
free security with no inflation added
- Nominal = Real Risk Free Rate + Expected Inflation Rate
Required Rate of Return - ANSWER-Required Rate of Return for an investor to willingly invest
Discount Rate - ANSWER-Used interchangeably with interest rates, especially in use of discounting cash
flows
Opportunity Cost - ANSWER-The gain that is missed by not investing in a particular investment
Effective Annual Rate - ANSWER-The actualy rate of interst that is actually being earned after
compounding more than annually
Continuous Compounding - ANSWER-1. Multiply rate by time
2. Multiple answer by e (Second LN)
, 3. Multiply by PV
Present Value of Perpetuity - ANSWER-Financial instrument that pays a fixed amount of money at set
intervals over an infinite period of time
Present Value of a Projected Perpetuity - ANSWER-1. Calculate PV of Perpetuity
2. Find present value of (N -1)
PV of Uneven Cash Flows - ANSWER-1. Clear Memory
2. Enter 0 in CF0
3. Enter Cash Flows in Sequence
4. NPV = Discount Rate
5. ComputeT NPV
FV of Uneven Cash Flows - ANSWER-1. Calculate the FV of each individual Cash Flow
2: Then add the results together
Calculating the Growth Rate - ANSWER-Or use TMV calculator
1. N = Periods, PV = PV, PMT = 0, FV = FV
2. Compute I/Y
Annual Payments (Amortization) - ANSWER-1. N = Years, I/Y = Interest, PV = Loan Amount, FV = 0
2. Compute Payments
Calculate Amortization Schedule - ANSWER-1. Calculate Loan Payment
2. Calculate Interest Component (Beginning balance x I/Y)
3. Calculate Principal component (Payment - Interest Component)
4.The following beginning balance is the first period balance - principal component only. (Interest goes to
bank)
