CFA Level 1 - Quantitative Methods
Default Risk - answer Risk that a borrower will not make promised payments
Liquidity Risk - answer Risk of receiving 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 actually rate of interest that is actually being earned
after compounding more than annually
Continuous Compounding - answer1. Multiply rate by time
2. Multiple answer by e (Second LN)
3. Multiply by PV
Present Value of Perpetuity - answerFinancial instrument that pays a fixed amount of
money at set intervals over an infinite period of time
Present Value of a Projected Perpetuity - answer1. Calculate PV of Perpetuity
2. Find present value of (N -1)
PV of Uneven Cash Flows - answer1. 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 - answer1. Calculate the FV of each individual Cash Flow
2: Then add the results together
Calculating the Growth Rate - answerOr use TMV calculator
1. N = Periods, PV = PV, PMT = 0, FV = FV
2. Compute I/Y
Annual Payments (Amortization) - answer1. N = Years, I/Y = Interest, PV = Loan
Amount, FV = 0
2. Compute Payments
Calculate Amortization Schedule - answer1. 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)
Cash Flow Additivity Principle - answerPresent value of any stream of cash flow equals
the sum of the present values of the cash flows.
Ex: Cash flows of $100 for 4 Years & a $300 payment that occurs in year 3. Calculate
the PV of both and add them together.
(Use the Unequal Cash flow method.)
NPV - answerPresent Value of expected cash inflows minus the present value of the
expected outflows, discounted at the appropriate rate.
Use the Calculator (Cash Flow):
Set CF0 = 0 (for profit)
Set CF0 = Initial negative outflow (for total NPV)
IRR - answerDiscount rate that makes NPV equal to zero
Use Calculator (Cash Flows):
1.CF0 = Initial Cash Outlay
2.CF1.....CFn
3.Compute IRR
Capital Budgeting - answerThe allocation of funds to relatively long range projects or
investments
Capital Structure - answerThe choice of long-term financial for the investments the
company wants to make
Default Risk - answer Risk that a borrower will not make promised payments
Liquidity Risk - answer Risk of receiving 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 actually rate of interest that is actually being earned
after compounding more than annually
Continuous Compounding - answer1. Multiply rate by time
2. Multiple answer by e (Second LN)
3. Multiply by PV
Present Value of Perpetuity - answerFinancial instrument that pays a fixed amount of
money at set intervals over an infinite period of time
Present Value of a Projected Perpetuity - answer1. Calculate PV of Perpetuity
2. Find present value of (N -1)
PV of Uneven Cash Flows - answer1. 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 - answer1. Calculate the FV of each individual Cash Flow
2: Then add the results together
Calculating the Growth Rate - answerOr use TMV calculator
1. N = Periods, PV = PV, PMT = 0, FV = FV
2. Compute I/Y
Annual Payments (Amortization) - answer1. N = Years, I/Y = Interest, PV = Loan
Amount, FV = 0
2. Compute Payments
Calculate Amortization Schedule - answer1. 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)
Cash Flow Additivity Principle - answerPresent value of any stream of cash flow equals
the sum of the present values of the cash flows.
Ex: Cash flows of $100 for 4 Years & a $300 payment that occurs in year 3. Calculate
the PV of both and add them together.
(Use the Unequal Cash flow method.)
NPV - answerPresent Value of expected cash inflows minus the present value of the
expected outflows, discounted at the appropriate rate.
Use the Calculator (Cash Flow):
Set CF0 = 0 (for profit)
Set CF0 = Initial negative outflow (for total NPV)
IRR - answerDiscount rate that makes NPV equal to zero
Use Calculator (Cash Flows):
1.CF0 = Initial Cash Outlay
2.CF1.....CFn
3.Compute IRR
Capital Budgeting - answerThe allocation of funds to relatively long range projects or
investments
Capital Structure - answerThe choice of long-term financial for the investments the
company wants to make
