Ch 12 Flashcards
The six functions of a dollar are defined as:
“The six related compound interest functions used in the mathematics of finance and shown in standard compound interest tables.”
The definition of compound interest is
“Interest earned on the original investment amount and on previously earned interest.”
The definition of discounting is
Conversion of benefits received in the future (e.g., periodic incomes, cash flows, reversion) to present value.
Money paid at the beginning of a time period for the use of capital during that period; commonly deducted from the principal when the funds are advanced.
(Present value of future benefits)
The six functions of a dollar are:
(long list)
Amount of $1 (The amount to which $1 will grow)
Amount of $1 Per Period (The amount to which $1 per period will grow)
Sinking Fund Factor (The amount per period which will grow to $1)
Present Value of $1 (What $1 due in the future is worth today)
Present Value of $1 per period (What $1 payable periodically is worth today)
Partial Payment (Amount to amortize $1)
The first three functions solve for future values while the last three solve for present values.
Annuity is defined as:
“A contract providing for regular payments of predictable amounts. Regular payments are those that occur at a constant periodic rate, such as monthly, quarterly, or annually. Predictable amounts include those that are level, that escalate based on the Consumer Price Index, that step up, or that can be predicted in any other way.”
A mortgage capitalization rate is defined as
“The capitalization rate for debt; the ratio of the annual debt service to the principal amount of the mortgage loan. The mortgage capitalization rate (RM) is equivalent to the periodic (monthly, quarterly, annually) mortgage constant times the number of payments per year on a given loan on the day the loan is initiated.
RM = Annual Debt Service / Mortgage Principal.”
