ch 6 discounted cash flow valuation

Question 1

annuity

Answer 1

a series of constant or level cash flows that occur at the end of each period for some fixed number of periods

Question 2

annuity present value equation

Answer 2

PV = C {[1-(1/(1+r)^t)]/r}

Question 3

annuity FV factor equation

Answer 3

annuity FV factor = [(1+r)^t -1]/r

Question 4

annuity due

Answer 4

annuity for which the cash flows occur at the beginning of each period

Question 5

annuity due value equation

Answer 5

annuity due = ordinary annuity value x (1+r)

Question 6

perpetuity

Answer 6

when the level stream of cash flows continues forever

Question 7

PV for a perpetuity equation

Answer 7

PV for a perpetuity = C/r

Question 8

growing perpetuity

Answer 8

when we can assume the cash flow will rise indefinitely

Question 9

PV growing perpetuity equation

Answer 9

PV = C/(r-g)

Question 10

growing annuity

Answer 10

finite number of growing cash flows

Question 11

PV growing annuity equation

Answer 11

PV = C/(r-g) x [1-{(1+g)/(1+r)}^t]

Question 12

effective annual rate (EAR)

Answer 12

the actual rate paid (or received after accounting for compounding that occurs during the year

Question 13

annual percentage rate (APR)

Answer 13

period rate times the number of periods per year

Question 14

pure discount loan

Answer 14

borrower receives money today and repays a single lump sum at some time in the future
ex. treasury bills

Question 15

interest only loan

Answer 15

borrower pays interest each period to repay the entire principle at some point in the future
ex. bonds

Question 16

amortized loan

Answer 16

lender may require the borrower to repay parts of the principal over time
ex. student loan