Single-period investment

Examples of Single-period investment in the following topics:

• Single-Period Investment

  • What is the value of a single-period, $100 investment at a 5% interest rate?
  • If you plan on leaving the money there for one year, you're making a single-period investment.
  • Any investment for more than one year is called a multi-period investment.
  • Let's go through an example of a single-period investment.
  • Since this is a single-period investment, t (or n) is 1.

• Single-Period Investment

  • When considering a single-period investment, n is one, so the PV is simply FV divided by 1+i.
  • The amount of time is also represented by a variable: the number of periods (n).
  • All of these variables are related through an equation that helps you find the PV of a single amount of money.
  • When considering a single-period investment, n is, by definition, one.
  • The FV is related to the PV by being i% more each period.

• Calculating the Yield of a Single-Period Investment

  • The yield of a single period investment is simply $\frac { \left( FV\quad -\quad PV \right) }{ PV } \ast 100%.$ .
  • In short, it's how much you get back on your investment.
  • The whole point of making an investment is to get a yield.
  • Nominal APR is simply the interest rate multiplied by the number of payment periods per year.
  • Differentiate between the different methods of calculating yield of a single period investment

• Multi-Period Investment

  • Multi-period investments are investments with more than one period, so n (or t) is greater than one.
  • Things get marginally more complicated when dealing with a multi-period investment.
  • That is, an investment where n is greater than 1.
  • Just as with a single-period investment, you simply plug in the FV, i and n in order to find the PV.
  • The number of periods, however, is not 24--it is 2.

• Number of Periods

  • In , nrepresents the number of periods.
  • A period is just a general term for a length of time.
  • The length of one period must be the same at the beginning of an investment and at the end.
  • In compound interest, the interest in one period is also paid on all interest accrued in previous periods.
  • Define what a period is in terms of present value calculations

• Advantages of the Payback Method

  • Payback period as a tool of analysis is easy to apply and easy to understand, yet effective in measuring investment risk.
  • Payback period in capital budgeting refers to the period of time required for the return on an investment to "repay" the sum of the original investment.
  • As a stand-alone tool to compare an investment to "doing nothing," payback period has no explicit criteria for decision-making (except, perhaps, that the payback period should be less than infinity).
  • The payback period is an effective measure of investment risk.
  • Payback period method is suitable for projects of small investments.

• Implications for Variance

  • A diversified portfolio containing investments with small or negative correlation coefficients will have a lower variance than a single asset portfolio.
  • As you can see from the graphic below, there is still considerable risk to an investor who is heavily invested in stocks, even with a blended portfolio.
  • Asset diversification has been described as "the only free lunch you will find in the investment game".
  • Although risk is reduced as long as correlations are not perfect, it is typically forecast (wholly or in part) based on statistical relationships (like correlation and variance) that existed over some past period.
  • A diversified portfolio containing investments with small or negative correlation coefficients will have a lower variance than a similar portfolio of one asset type.

• Calculating Present Value

  • Calculating the present value (PV) is a matter of plugging FV, the interest rate, and the number of periods into an equation.
  • Calculating the present value (PV) of a single amount is a matter of combining all of the different parts we have already discussed.
  • This is the percentage of interest paid each period.
  • One area where there is often a mistake is in defining the number of periods and the interest rate.
  • Simple interest is when interest is only paid on the amount you originally invested (the principal).

• Assets

  • Cash equivalents are distinguished from other investments through their short-term existence; they mature within 3 months whereas short-term investments are 12 months or less, and long-term investments are any investments that mature in excess of 12 months.
  • A deferred expense or prepayment, prepaid expense (plural often prepaids), is an asset representing cash paid out to a counterpart for goods or services to be received in a later accounting period.
  • For example, if a service contract is paid quarterly in advance, at the end of the first month of the period two months remain as a deferred expense.
  • In the deferred expense, the early payment is accompanied by a related, recognized expense in the subsequent accounting period, and the same amount is deducted from the prepayment.
  • In the investor's income statement, the proportional share of the investee's net income or net loss is reported as a single-line item.

• Defining the Payback Method

  • A $1000 investment which returned $500 per year would have a two year payback period.
  • In capital budgeting, the payback period refers to the period of time required for the return on an investment to "repay" the sum of the original investment.
  • As a stand-alone tool to compare an investment, the payback method has no explicit criteria for decision-making except, perhaps, that the payback period should be less than infinity.
  • An implicit assumption in the use of the payback method is that returns to the investment continue after the payback period.
  • The payback period is usually expressed in years.