Introduction to Computational Finance and Financial ...

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Introduction to Computational Finance and

Financial Econometrics

Return Calculations

Eric Zivot

Winter 2015

Eric Zivot (Copyright ? 2015)

Return Calculations

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Outline

1 The time value of money

Future value

Multiple compounding periods

Effective annual rate

2 Asset return calculations

Eric Zivot (Copyright ? 2015)

Return Calculations

2 / 56

Outline

1 The time value of money

Future value

Multiple compounding periods

Effective annual rate

2 Asset return calculations

Eric Zivot (Copyright ? 2015)

Return Calculations

3 / 56

Future value

$V invested for n years at simple interest rate R per year

Compounding of interest occurs at end of year

FVn = $V ¡¤ (1 + R)n ,

where FVn is future value after n years

Eric Zivot (Copyright ? 2015)

Return Calculations

4 / 56

Example

Consider putting $1000 in an interest checking account that pays a

simple annual percentage rate of 3%. The future value after n = 1, 5

and 10 years is, respectively,

FV1 = $1000 ¡¤ (1.03)1 = $1030,

FV5 = $1000 ¡¤ (1.03)5 = $1159.27,

FV10 = $1000 ¡¤ (1.03)10 = $1343.92.

Eric Zivot (Copyright ? 2015)

Return Calculations

5 / 56

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