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CFA Level 1: Quant Study Guide with Complete and Verified Solutions

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CFA Level 1: Quant Study Guide with Complete and Verified Solutions nominal risk free rate equals... - Answer️️ -real risk free rate + expected inflation required interest rate on a security - Answer️️ -nominal risk free rate + default risk premium + liquidity premium + maturity risk pr...

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  • September 14, 2024
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EXAM_SOLUTIONS GUARANTEED SUCCESS 2024/2025 ACADEMIC YEAR




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, ©SOPHIABENNETT EXAM SOLUTIONS_2024/2025 Tuesday, September 3, 2024 10:30 AM



CFA Level 1: Quant Study Guide with
Complete and Verified Solutions


nominal risk free rate equals... - Answer✔️✔️-real risk free rate + expected inflation


required interest rate on a security - Answer✔️✔️-nominal risk free rate + default risk

premium + liquidity premium + maturity risk premium

EAR or APY - Answer✔️✔️-(1+periodic rate)^m - 1



always higher than annual percentage rates (not compounded)

ordinary annuity - Answer✔️✔️-cash flows that occur at the end of each compounding

period

annuity due - Answer✔️✔️-payments or receipts occur at the beginning of each period

PV of Perpetuity - Answer✔️✔️-Payment/interest rate

Effect of increase in the frequency of compounding rates - Answer✔️✔️-increases FV,

decreases PV

amortization schedule - Answer✔️✔️-interest component = interest rate * beginning

balance

principal component = payment - interest component

ending balance = period's beginning balance (last period's ending balance) - principal

component

holding period return - Answer✔️✔️-(ending value-beginning value) / beginning value OR

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, ©SOPHIABENNETT EXAM SOLUTIONS_2024/2025 Tuesday, September 3, 2024 10:30 AM


(Ending value / beginning value) - 1

time-weighted rate of return - Answer✔️✔️-The compound rate of growth of one unit of

currency invested in a portfolio during a stated measurement period; a measure of

investment performance that is not sensitive to the timing and amount of withdrawals or

additions to the portfolio. Also a geometric mean return

money weighted return - Answer✔️✔️-IRR based on cash inflows and outflows

Bank discount yield - Answer✔️✔️-RBD = D/F * 360/t Where: D = dollar discount from

face value, F = face value, T = days until maturity, 360 = days in a year



US T-Bills are quoted on a bank discount basis

holding period yield - Answer✔️✔️-Holding Period Return = (ending value/beginning

value) - 1



EAY^t/365 - 1



total return an investor earns between the purchase date and the sale or maturity date

effective annual yield - Answer✔️✔️-EAY = (1 + HPY)^365/t - 1 where t is days to

maturity. Remember that EAY > bank discount yield, for three reasons: (a) yield is

based on purchase price, not face value, (b) it is annualized with compound interest

(interest on interest), not simple interest, and (c) it is based on a 365-day year rather

than 360 days. Be prepared to compare these two measures of yield and use these

three reasons to explain why EAY is preferable.

money market yield (Rmm) - Answer✔️✔️-= HPR * (360/days until maturity)

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