Rates and Returns – Module 1 – Quantitative Methods – CFA® Level I 2026

hey everyone welcome to today's session we're going to dig into some really important stuff for the CFA level one exam interest rates and returns I know this topic can feel a bit like drinking from a fire hose but hang tight we'll take it step by step by the end of this lecture you'll have a solid handle on these Concepts and know how to use them in real world scenarios let's get rolling first off let's chat about the time value of money TV M this concept is a big deal in finance and investing basically the time value of money means that a dollar today is worth more than a dollar tomorrow why is that because you can invest that dollar today and earn some returns this principle helps us compare cash flows that happen at different times imagine you have $99524 today and someone offers you $10,000 a year from now the difference of $476 is the payoff for waiting a year this translates to an interest rate of 5% interest rates can be broken down in three main ways number one is required rate of return this is the minimum return that an investor expects to earn from an investment think of it as the hurdle you need to clear to make the investment worthwhile number two is discount rate this rate is used to bring future cash flows back to their present value it's like asking what's that $110,000 next year worth in today's dollars number three is opportunity cost this is the return you miss out on by choosing to spend money today rather than saving or investing it for example if you spend $1,000 today instead of investing it at a 5% return you miss out on $150 of earnings interest rates are made up of several components number one is the this is the return on a risk-free investment with no expected inflation