Time Value of Money (TVM) - computing the Effective Annual Rate (EAR) (for the @CFA Level 1 exam)

[@RAJIV1987CH]

❤

[@user-vo1sy1hz7s]

What's the difference between discrete compounding and continuous compounding? And you're talking about discrete compounding here, right?

[@letmeexplaincfa]

Discrete compounding is when you have compounding occurring with a specified frequency like quarterly or monthly. Continuous compounding occurs when you compound constantly and frequency effectively goes to infinity. The latter is used mainly in derivatives pricing and valuation models.

[@Iamlearning-o7y]

If we put them all together, what is the difference between stated rate, effective rate, required rate of return, discount rate, WACC (cost% capital) Which terms can be used interchangeably? And which topics will it touch on for us to keep in mind

[@letmeexplaincfa]

Hi, they can all appear interchangeably to be honest. The name typically depends on topic area. These terms appear in quantitative methods, fixed income, equity investments, portfolio mgmt and corporate issuers.

[@mostafaemad740]

Sir , you dont include this video on the second lesson for the quantitative in the website , is it related to other topic ?

[@letmeexplaincfa]

No, don't worry about it. No longer relevant

[@mostafaemad740]

@@letmeexplaincfa okay thanks sir for the usual immediate responses

[@harveymack2912]

@@letmeexplaincfa Sorry, but does this mean for 2024 / 2025 we dont need this optional playlist?

[@letmeexplaincfa]

@@harveymack2912 the Curriculum for 2025 is pretty much the same as for 2024, so the same content applies

[@mammmmmoth]

is there a easy way to figure out APR from EAR say 9 % compounded semi annually?

[@letmeexplaincfa]

Yes, you can do it by reverse engineering the formula. When I'm in front of a computer, I'll write it out.

[@mammmmmoth]

@@letmeexplaincfa Great thanks

[@letmeexplaincfa]

Ok, so if you take the basic relationship: EAR = (1 + r/m)^m - 1 (1 + r/m)^m = (1 + EAR) 1 + r/m = (1 + EAR)^(1/m) r = [(1 + EAR)^(1/m) - 1]m So, for an EAR of 9% and m = 2, you will get: r = [1.09^(1/2) - 1] x 2 = 8.806% Its not the most intuitive of transformations and hopefully you won't have to do this on the exam!

[@mammmmmoth]

@@letmeexplaincfa thank you