General Thoughts on Formulas and Mistakes

1. many mistakes I make are on the small things e.g. not reading the question correctly, forgetting to do something simple like divide the interest rate or coupon by the number of periods etc.
2. to reinforce the above: underline key data in a question including putting a big circle around words like least likely or most appropriate etc. - getting these right could easily improve my scores by 5-10% and are a stupid-ass reason to lose points.

Understanding Formulas
Several formula seem to crop up again and again in various guises so I'm going to try and explain generally what they are useful for and how they work:

1. weighted average - whenever you are trying to find an average (e.g. expected return) on a set of outcomes that are not equally represented in the set
2. powers - raising returns/yields to a power of n represents compounding that yield over n periods
3. geometric mean - when the return/yield is different for each of n periods and you need an average, multiply all the returns/yields together and take the nth root
4. percentage change between two periods e.g. Holding period return, change in bond price after interest rate change etc. is the (final period value - original value)/original value NB this not the way you would do it when calculating change in price say for the elasticity calc - that would be P1-P0/(avg P1,P0)
5. discounting - discounting cash flows or even interest rates (unsurprisingly) happens a lot and is usually happening over several periods so you are undoing compounding of interest etc. so: value to be discounted/(1+I/Y)ⁿ
6. spot versus forward rates spot rates are the one interest rate for the period of the loan e.g. a 3 yr spot rate would be the discount rate for the entire three years whereas a forward rate would be used for each of the periods to discount the cash flows. So for two periods if you have 1 yr spot of 5% and fwd of 5% and 2yr spot of 6% and fwd of 6% then to calc PV of cash at the end of two years using spot rate, you would use 6% as your discount. To calc PV of cash at the end of two years using forward rate, you would discount year one at 5% and yr 2 cash flow at 6% then 5%
7. Increasing or decreasing an amount by a certain percentage (e.g. finding next/last dividend, profit on a stock portfolio based on growth rate, etc.): increase = amt*(1+x), decrease = amt*(1-x)

Valuing a security
most valuations involve a PV of the expected cash flows
expected return can be compared against required return to decide buy or sell

Conducting any analysis tends to consist of these kinds of steps:

• set the objective or goal
• collect the relevant data
• process the data to get usable numbers
• analyse and interpret the data
• recommendation based on data
• monitor and update the analysis

this appears to be true of individual company analysis, financial statement analysis, hypothesis testing, etc.

when conducting the analysis, work from general to specific e.g. economic analysis, industry analysis, firm analysis, firm security analysis.