R1 Time Value of Money

This study session introduces quantitative concepts and techniques used in financial analysis and investment decision making. The time value of money and discounted cash flow analysis form the basis for cash flow and security valuation. Descriptive statistics used for conveying important data attributes such as central tendency, location, and dispersion are presented. Characteristics of return distributions such as symmetry, skewness, and kurtosis are also introduced. Finally, all investment forecasts and decisions involve uncertainty: Therefore, probability theory and its application quantifying risk in investment decision-making is considered.

CFA L1 – Study Session 2

1. interpret interest rates as required rates of return, discount rates, or opportunity costs;
2. explain an interest rate as the sum of a real risk-free rate and premiums that compensate investors for bearing distinct types of risk;
3. calculate and interpret the effective annual rate, given the stated annual interest rate and the frequency of compounding;
4. solve time value of money problems for different frequencies of compounding;
5. calculate and interpret the future value (FV) and present value (PV) of a single sum of money, an ordinary annuity, an annuity due, a perpetuity (PV only), and a series of unequal cash flows;
6. demonstrate the use of a time line in modeling and solving time value of money problems.