3. The time value of money pt. 2

Question 1

What is a perpetuity?

Answer 1

An annuity in which the cash flows continue forever

Question 2

What is the equation for perpetuity’s?

Answer 2

Perpetuity present value x rate = cash flow

Question 3

What are preference shares and perpetuity’s related?

Answer 3

Preference share buyers are promised a fixed cash dividend every period forever, this dividend must be paid before any other shareholders.

Question 4

What is NIR?

Answer 4

The Nominal Interest Rate, the interest advertised, which might be compounded more frequently, therefore would end up being something different, the EAR

Question 5

What is the EAR?

Answer 5

The Effective Annual interest Rate, the actual rate of interest to be earned or paid (taking into account frequent compounding)

Question 6

What is the comparison rate?

Answer 6

Commonly known as the ‘real rate’ it is the AAPR (annual average percentage rate) it takes into account fees, etc that are incurred with the loan

Question 7

What are other types of loans?

Answer 7

Interest Only Loan - only pay the interest per period and then the sum at the end
Amortised loans - is a usual loan, pay off the same amount each period, usually lots of interest being paid at the start and then gradually becomes less