In statistics, estimation refers to the process by which one makes inferences about a population, based on information obtained from a sample.
Point Estimate vs. Interval Estimate : Statisticians use sample statistics to estimate population parameters. For example, sample means are used to estimate population means; sample proportions, to estimate population proportions.
An estimate of a population parameter may be expressed in two ways:
POINT ESTIMATE : A point estimate of a population parameter is a single value of a statistic. For example, the sample mean x is a point estimate of the population mean μ. Similarly, the sample proportion p is a point estimate of the population proportion P.
INTERVAL ESTIMATE : An interval estimate is defined by two numbers, between which a population parameter is said to lie.
CONFIDENCE INTERVAL: Statisticians use a confidence interval to express the precision and uncertainty associated with a particular sampling method. A confidence interval consists of three parts.
1. A confidence level. 2. A statistic. 3. A margin of error. The Confidence Level describes the uncertainty of a sampling method. The Statistic and the Margin of Error define an interval estimate that describes the precision of the method. The interval estimate of a confidence interval is defined by the sample statistic + margin of error. Confidence intervals are preferred to point estimates, because confidence intervals indicate a the precision of the estimate and b the uncertainty of the estimate.
Confidence Level The probability part of a confidence interval is called a confidence level. The confidence level describes the likelihood that a particular sampling method will produce a confidence interval that includes the true population parameter.
Margin of Error In a confidence interval, the range of values above and below the sample statistic is called the margin of error.
Balance of payments ( BOPs) It is the overall record of all economic transactions of a country with the rest of the world. Balance of trade is the difference in the value of exports and imports of only visible items. Balance of trade includes imports and exports of goods alone i.e., visible items.
Face Value: The par value (i.e., principal, or maturity, value) of a security appearing on the face of the instrument.
Coupon: This is the amount of interest due and the date on which payment is to be made. Where the coupon is blank, it can indicate that the bond can be a “ zero-coupon,” a new issue, or that it is a variable-rate bond. In the case of registered coupons (see "Registered Bond"), the interest payment is mailed directly to the registered holder. Bearer coupons are presented to the issuer's designated paying agent or deposited in a commerical bank for collection. Coupons are generally payable semiannually.
Period: Period remaining of the bond.
Market Rate: Rate of other bonds in the market of similar nature.
Market Price: Price which general public is ready to pay to purchase the bond at a given period.
Sensitivity Analysis: A sensitivity analysis is a technique used to determine how different values of an independent variable will impact a particular dependent variable under a given set of assumptions. This technique is used within specific boundaries that will depend on one or more input variables, such as the effect that changes in interest rates will have on a bond's price.
A concept that refines an investment's return by measuring how much risk is involved in producing that return, which is generally expressed as a number or rating. Risk-adjusted returns are applied to individual securities and investment funds and portfolios.
Pay Back Period: The payback period is the time required for the amount invested in an asset to be repaid by the net cash outflow generated by the asset. It is a simple way to evaluate the risk associated with a proposed project.
The payback period is expressed in years and fractions of years. For example, if a company invests $300,000 in a new production line, and the production line then produces cash flow of $100,000 per year, then the payback period is 3.0 years ($300,000 initial investment / $100,000 annual payback). An investment with a shorter payback period is considered to be better, since the investor's initial outlay is at risk for a shorter period of time. The calculation used to derive the payback period is called the payback method.
Capital Rationing : Capital rationing refers to a situation where the firm is constrained for external, or self imposed, reasons to obtain necessary funds to invest in all investment projects with positive net present value (NPV). Under capital rationing, the management has not simply to determine the profitable investment opportunities, but it has also to decide to obtain that combination of the profitable projects which yields highest net present value (NPV) within the available funds.
Expected Net Present Value( NPV) is a capital budgeting technique which adjusts for uncertainty by calculating NPVs under different scenarios and probability-weighting them to get the most likely NPV.
For example, instead of relying on a single NPV, companies calculate NPVs under a range of scenarios; say base case, worst case and best case. They then estimates probability of occurrence of each scenario and then weight the NPVs calculated according to their relative probabilities to find the expected NPV.
Expected NPV is a more reliable estimate than the traditional NPV because it considers the uncertainty inherent in projecting future scenarios.