# Financial Modeling Basics Excel by dim29188

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```									FIN 735: Financial Modeling

Lawrence P. Schrenk.
Instructor
1.2

Financial Basics

Lawrence P. Schrenk      FIN 735: Financial Modeling
1.3

Overview
   Returns
 Holding Period Return
 Annualizing Returns
 Continuous-Time Returns

   Data Sources
 Fred
 EDGAR
 Money          Central

Lawrence P. Schrenk                   FIN 735: Financial Modeling
1.4

Financial Data

   Financial Data can be ambiguous. It can
be presented
   As a dollar value or a return
    a return of five percent can be written as either
‘0.05’ or just ‘5’.
   In annual, monthly, daily, etc. form
   form new-to-old or old-to-new

Lawrence P. Schrenk                         FIN 735: Financial Modeling
1.5

Holding Period Return

 The holding period return is the return
over some period of time.
 We calculate it from prices or levels:

NewValue  OldValue
HPR 
OldValue

Lawrence P. Schrenk          FIN 735: Financial Modeling
1.6

Holding Period Return (cont’d)
   Stock A sells for \$46.99 in January and
\$48.51 in February.

\$48.51  \$46.99
HPR                   0.032347308  3.23%
\$46.99

   But note this is the monthly return!

Lawrence P. Schrenk                FIN 735: Financial Modeling
1.7

Holding Period Return (cont’d)

 But this is not very useful if we are
comparing assets with different holding
periods.
 How do you easily tell whether a
quarterly or monthly return is better?

Lawrence P. Schrenk         FIN 735: Financial Modeling
1.8

Annualizing Returns
   Returns are typically ‘annualized’ to give
their equivalent annual return (EAR):

EAR  (1  rperiod )                            1
mnumberofperiodsinyear

   For our example:

EAR  (1  0.032347)  1           12

 0.4652388  46.52%
Lawrence P. Schrenk                    FIN 735: Financial Modeling
1.9

Annualizing Returns (cont’d)
   We can also move in the opposite direction:
1
mnumberofperiodsinyear

rperiod  1  EAR                             1

   For our example:
1

rperiod  1.4652   1
12

 0.032344724  3.23%
Lawrence P. Schrenk                                  FIN 735: Financial Modeling
1.10

Continuous Time

   In some applications, especially,
derivatives, it is easiest to use
continuous discounting/compounding.
This is to assume that there are an
infinite number of periods, m, in a year.

Lawrence P. Schrenk               FIN 735: Financial Modeling
1.11

Continuous Time (cont’d)
   The formula is:

rperiod ,continuous  e
rcontinuous t
1

 Note,    that in Excel, this would be:

EXP(r*t) - 1

Lawrence P. Schrenk                                 FIN 735: Financial Modeling
1.12

Continuous Time (cont’d)
   If the annual continuous time rate is 10%,
then the semi-annual, continuous rate is:

rcontinuous ,semi annual  e   0.10*.5
1
 0.051271  5.13%

Lawrence P. Schrenk                    FIN 735: Financial Modeling
1.13

Continuous Time (cont’d)
   Finally, we can convert the discrete annual
rate to the continuous annual rate as follows:

rdiscrete,annual  e                         1
rcontinuous ,annual

or
rcontinuous ,annual  ln 1  rdiscrete ,annual 
Lawrence P. Schrenk                           FIN 735: Financial Modeling
1.14

Continuous Time (cont’d)
   An annual, continuous rate of 10% is
equivalent to:

rdiscrete,annual  e  0.10
1  10.52%

Lawrence P. Schrenk              FIN 735: Financial Modeling
1.15

Summary

   You should be able to
 Convert        dollar returns to holding period
returns,
 Holding period returns to EAR (and vice
versa), and
 Use continuous-time returns and convert
between continuous and discrete returns.

Lawrence P. Schrenk                      FIN 735: Financial Modeling
1.16

Data Sites

   FRED
 http://research.stlouisfed.org/fred2/
 Data
rates
 Interest

 CPI, PPI

 Banking Data

 Macroeconomic Data

Lawrence P. Schrenk                 FIN 735: Financial Modeling
1.17

Data Sites (cont’d)
   Edgar
 http://www.sec.gov/edgar.shtml
 SEC   files since 1993
 Millions of forms

   EdgarScan
 http://edgarscan.pwcglobal.com/servlets/ed
garscan
 A better interface/search engine.

Lawrence P. Schrenk               FIN 735: Financial Modeling
1.18

Data Sites (cont’d)

   Money Central
 http://moneycentral.msn.com/
 An  MSN/Microsoft Product
 Company Data