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    Cheat Sheet Measuring Returns

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    thisisatrol
    The document defines and compares several financial rates and returns: 1) APR is the quoted interest rate, while EAR considers compounding interest over time. 2) HPR measures return over a holding period from purchase to sale price. Ann. HPR annualizes this return. 3) Multiple period returns can use simple or geometric averaging for returns over multiple periods. 4) IRR is the discount rate that sets the net present value of cash flows equal to the initial investment amount.

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    Cheat Sheet Measuring Returns

    Uploaded by

    thisisatrol
    91 views1 page
    The document defines and compares several financial rates and returns: 1) APR is the quoted interest rate, while EAR considers compounding interest over time. 2) HPR measures return over a holding period from purchase to sale price. Ann. HPR annualizes this return. 3) Multiple period returns can use simple or geometric averaging for returns over multiple periods. 4) IRR is the discount rate that sets the net present value of cash flows equal to the initial investment amount.

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    Cheat Sheet Measuring Returns

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    The document defines and compares several financial rates and returns: 1) APR is the quoted interest rate, while EAR considers compounding interest over time. 2) HPR measures return over a holding period from purchase to sale price. Ann. HPR annualizes this return. 3) Multiple period returns can use simple or geometric averaging for returns over multiple periods. 4) IRR is the discount rate that sets the net present value of cash flows equal to the initial investment amount.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    91 views1 page

    Cheat Sheet Measuring Returns

    Uploaded by

    thisisatrol
    The document defines and compares several financial rates and returns: 1) APR is the quoted interest rate, while EAR considers compounding interest over time. 2) HPR measures return over a holding period from purchase to sale price. Ann. HPR annualizes this return. 3) Multiple period returns can use simple or geometric averaging for returns over multiple periods. 4) IRR is the discount rate that sets the net present value of cash flows equal to the initial investment amount.

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    of 1

    Remember:

    𝟏
    𝒏
    1. APR (Annual Percentage Rate) = quoted rate √𝒙 = 𝒙 𝒏
    APR= (interest per period rate) x (number of compounding periods in a year) 𝒆 → 𝒙 = 𝒍𝒏(𝒆 𝒙 )
    𝒙

    2. EAR (Effective Annual Rate)


    𝐴𝑃𝑅 𝑚𝑇
    𝐹𝑉 = 𝑃𝑉 × (1 + )
    𝑚
    where, m is the number of times per year interest is compounded (e.g. monthly is 12, quarterly is 4,
    semiannually is 2), and T is the length of time in years.

    The difference between EAR and AER is that APR does not consider interest-on-interest
     EAR = (1 + APR/m) m – 1 (with compounding m times a year)
     EAR = 𝒆𝑨𝑷𝑹 – 1 (with continuously compounded interest)

    3. HPR (Holding Period Return): measures the return on an asset or portfolio over the whole period during
    which it was held (time T).
    𝑉(𝑇) 𝑉(𝑇) = $ value of asset/portfolio at time T
    𝐻𝑃𝑅 = ( )−1 (sale price + cash from dividends)
    𝑉(0) 𝑉(0) = $ cost of asset/portfolio at time 0

    4. Ann.HPR (annualized HPR) is the annualization of the HPR.


     Assuming compounding
    1
    𝑉(𝑇) ⁄𝑇
    𝑎𝑛𝑛. 𝐻𝑃𝑅 = ( ) −1
    𝑉(0)
    where 1/T is the fraction (or multiple) of a year over which the HPR is calculated.
     Assuming simple interest
    𝑉(𝑇)
    ( )−1
    𝑉(0)
    𝑎𝑛𝑛. 𝐻𝑃𝑅 = ( )
    𝑇

     Note: for a bond, HPR = YTM if the bond is held to maturity. When bond is sold before maturity, the two
    might be different if market required interest rates has changed. E.g., HPR < YTM if market interest rate
    increased (b/c people discount future cash flows at higher rate, and therefore sale price is lower).

    5. Multiple period returns with simple average (generalization of ann.HPR with simple interest)
    1
    (r1 + r2 + r3 + ... + rT )
    T
    where T is the number of periods of the investments (example: 3 years, 10 years)

    6. Multiple period return with geometric average (generalization of ann.HPR with compounded interest)
    [(1  r1 )(1  r2 )(1  r3 )...(1  rT )]1/ T  1
    1/ T
     accumulate d value T 
       1
     value 0 

    where T is the number of periods of the investments (example: 3 years, 10 years)

    7. Internal Rate of Return (IRR) satisfies


    (𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑃𝑟𝑖𝑐𝑒) = (𝑃𝑉 𝑜𝑓 𝑓𝑢𝑡𝑢𝑟𝑒 𝑛𝑒𝑤 𝑐𝑎𝑠ℎ 𝑓𝑙𝑜𝑤𝑠)
    ∞
    𝐶(𝑡)
    𝑉(0) = 𝑃𝑉 = ∑
    (1 + 𝐼𝑅𝑅)𝑡
    𝑡=1
     IRR useful to do project evaluation: invest in project if IRR > hurdle rate of investor.

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