CAIA Level 1 - Chapter 3 - Quantitative Foundations Questions and Answers Already Passed

CAIA Level 1 - Chapter 3 - Quantitative Foundations Questions and Answers Already Passed Compounding - Answers - is the recognition of interest on interest or, more generally, earnings on earnings Simple Interest - Answers - a quick and easy method of calculating the interest charge on a loan and does not incorporate compounding Continuous Compounding - Answers - mathematical limit that compound interest can reach if it's calculated and reinvested into an account's balance over a theoretically infinite number of periods. Discrete Compounding - Answers - the method by which interest is calculated and added to the principal at certain set points in time such as daily, monthly, or annual Log Return - Answers - is a continuously compounded return that can be formed by taking the natural logarithm of a wealth ratio Return Computation Interval - Answers - for a particular analysis is the smallest time interval for which returns are calculated, such as daily, monthly, or even annually Return on notional principal - Answers - divides economic gain or loss by the notional principal of the contract Notional Principal - Answers - in an interest rate swap, is the predetermined dollar amounts, or principal, on which the exchanged interest payments are based. The notional principal never changes hands in the transaction Fully collateralized - Answers - means that a position (such as a forward contract) is assumed to be paired with a quantity of capital equal in value to the notional principal of the contract Partially collateralized position - Answers - has collateral lower in value than the notional value Internal Rate of Return (IRR) - Answers - is a metric used in capital budgeting to estimate the profitability of potential investments. - a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. - calculations rely on the same formula as NPV does. Lifetime IRR - Answers - contains all of the cash flows, realized or anticipated, occurring over the investments entire life, from period 0 to period T Since-inception IRR - Answers - is commonly used as a measure of fund performance rather than the performance of an individual investment Interim IRR - Answers - is a computation of IRR based on realized cash flows from an investment and its current estimated residual value - can be calculated on an investment purchased subsequent to its inception Point-to-point IRR - Answers - is a calculation of performance over part of an investment's life. Complex Cash Flow Pattern - Answers - is an investment involving either borrowing or multiple sign changes. Borrowing Type Cash Flow Pattern - Answers - begins with one or more cash inflows and is followed only by cash outflows. - an example is when an investment such as a real estate project is sold and leased back. The divestment generates current cash at the cost of future cash outflows and may be viewed as a form of borrowing. Multiple Sign Change Cash Flow Pattern - Answers - is an investment where the cash flows switch over time from inflows to outflows, or from outflows to inflows, more than once.