The 4 Types of Yields Used to Value Money Market Instruments

Money market instruments are those financial instruments that mature in less than a year, e.g. Treasury Bills, commercial papers or municipal notes. Most T-bills have a maturity of either 91 days or 180 days. The yield on these instruments can…

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Time-Weighted Rate of Return

The time-weighted rate of return (TWRR) measures the compound growth rate of an investment portfolio.  Unlike the money-weighted rate of return, TWRR is not sensitive to withdrawals or contributions. Essentially, the time-weighted rate of return is the geometric mean of…

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Holding Period Return

Holding period return refers to the change in the value of an investment over the period it is held, expressed as a percentage of the originally invested amount. It also captures any additional income that one earns from an investment.

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Using Money-weighted Rate of Return to Evaluate the Performance of an Investment

The money-weighted rate of return (MWRR) refers to the internal rate of return on a portfolio. It is the rate of discount, r, at which:

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Using a Timeline to Model Cash Flows and Solve Time Value of Money Problems

A timeline is a physical illustration of the amounts and timing of cash flows associated with an investment project. Cash flows that are regular and of equal amounts can be modeled as annuities. In such exam problems, all you have…

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The Internal Rate of Return

The internal rate of return is the discount rate that sets the present value of all cash inflows of a project equal to the present value of all cash outflows of the same project. In other words, it is the…

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NPV Vs IRR

Net present value (NPV) and the internal rate of return (IRR) are both techniques that can be used by financial institutions or individuals when making major investment decisions. Each method has its own strengths and weaknesses. However, the net present…

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Net Present Value of an Investment Project

The Net present value (NPV) of a project refers to the present value of all cash inflows minus the present value of all cash outflows, evaluated at a given discount rate. The difference between the two represents the income generated…

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Present Values and Future Values of Investments when compounding period is non-annual.

Some types of investments are known to accumulate interest more than once a year. This results from semi-annual, quarterly, monthly or daily compounding. This, in turn, leads to different present values or future values of an investment depending on the…

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Effective Annual Rate of Interest, EAR

The effective annual rate of interest (EAR) refers to the rate of return earned by an investor in a year, taking into account the effects of compounding. Remember, compounding is the process by which invested funds grow exponentially as a…

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