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Appendix A

Primer on Return, Present Value, and Future Value

Holding Period Yield

The rate of return an investor earns from holding a security is equal to the total dollar return received from the security per period of time (e.g., year) expressed as a proportion of the price paid for the security. The total dollar return includes income payments (coupon interest or dividends), interest earned from reinvesting the income during the period, and capital gains or losses realized when the security is sold or matures. For example, an investor who purchased XYZ stock for S0 = \$100, then received \$10 in dividends (D) two years later when he sold the stock for ST = \$120, would realized a rate of return for this two-year period of 20 percent:

Similarly, ...

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