Rates and Returns

The Essential TVM Notes for the CFA Level I Exam

Time value of money (TVM) is a fundamental concept in finance, and mastering it is crucial for your CFA Level 1 success. Fear not, for we’re here to help! Let’s embark on a whirlwind tour of TVM, covering the key lessons and sprinkling in some humor along the way.

Interest Rates and Time Value of Money

In this delightful introduction, you’ll become a money-lending wizard as you uncover the mystery of interest rates and risk premiums. Discover the five magical components that make up interest rates and learn to interpret them in three enchanting ways: required rate of return, discount rate, and opportunity cost. Poof! You’re one step closer to acing that CFA exam!

► Wave your wand and start learning here.

Future Value and Compounding

Ready to unravel the secrets of time? This lesson will teleport you to the world of single cash flows, where you’ll learn to calculate future value and effective annual rates. Journey through the realm of compounding, and find out how continuous compounding can grow your wealth. Adventure awaits!

► Time-travel into the lesson here.

PRE: Present Value of a Single Cashflow

Reverse into the world of present value, where the future value formula gets a makeover! Master the art of determining how much to invest today for your future goals. Be prepared to conquer different compounding frequencies and scenarios with ease. The present is a gift, so let’s unwrap it!

► Unbox the present value lesson here.

PRE: Series of Cash Flows

Dive into the realm of multiple cash flows! Learn to calculate future values with regular and uneven cash flows using the powerful time value of money functions on your calculator. Master the art of adjusting payments and timelines, and before you know it, you’ll be the cash flow wizard!

► Flow into the world of multiple cash flows here.

PRE: Annuities

Conquer the world of annuities and perpetuities! Learn the difference between ordinary annuities, annuity dues, and perpetuities, and get hands-on with calculating their present values. With your trusty TVM calculator by your side, you’ll be a master of these financial instruments in no time.

► Unleash your inner annuity maestro here.

Measures of Return

Crack the code to measuring portfolio returns! Grasp the concept of single-period returns using the holding period return formula and learn to annualize returns. Dive into multi-period returns and understand various ways to calculate average return, including arithmetic mean, geometric mean, and money-weighted return. Finally, get a handle on other return expressions like gross and net returns, pre and post-tax nominal returns, real returns, and leveraged returns.

► Ready to boost your knowledge of portfolio return measures? Click here.

Money-Weighted and Time-Weighted Return

Dive into the nuances of portfolio return measurement, focusing on the Money Weighted Rate of Return (MWRR) and Time Weighted Rate of Return (TWRR), essential for evaluating investment performance accurately. Learn how MWRR accounts for the timing and size of cash flows, making it ideal for individual investors, while TWRR provides a clearer picture of investment performance, invaluable for comparing fund managers or investment strategies.

Check out the full explanation here.