Chapter 1 Introduction to valuation: the time value of money Flashcards
the process of accumulating interest on an investment over time to earn more interest
compounding
the amount an investment is worth after one or more periods (the cash value of an investment at some time in the future
future value (FV)
interest earned on the reinvestment of previous interest payments
interest on interest
interest earned on both the initial principal and the interest reinvested from prior periods
compound interest
interest earned only on the original principle amount invested (interest is not reinvested
simple interest
the rate at which your money grows, assuming you dont remove any of it on an interest bearing account you are depositing money in
interest rate
the current value of future cash flows discounted at the appropriate discount rate (How much do we have to invest to day at 10% to get $1 in one year?)
present value (PV)
Present value instead of compounding the money forward like future value, we ?
discount it back to the present
calculate the present value of some future amount
discount
the rate used to calculate the present value of future cash flows
discount rate
calculating the present value of a future cash flow to determine its value today
Discounted cash flow (DCF) valuation
As the length of time until payment grows Present value does what
declines
The higher the discount rate is, what happens to present value
the lower the present value will be
Present value factor is the reciprocal of what
future value factor
whatever the interest rate or time period is, divide that by 72 to geta. rough estimate of the other value
72/r or 72/n
works best for values between 5 to 20%
Rule of 72
a dollar in hand today is worth more than a dollar promised at some time in the future
time value of money
the longer the period of time, what happens ot the future value
the greater the future value
the higher the interst rate, what happens to the future value
the greater the future value
the more frequently interest is compounded, what happpens to the future value
the greater the future value
the longer the period of time, what happens to the present value
the lesser the present value
the higher the interest (discount) rate, what happens to the present value
the lesser the present value
the more frequently interest is discounted, what happens to the present value
the lesser the present value
finance would not exist if not for what 2 things
interest
time
a series of constant or level cash flows that occur at the end of each period for some fixed number of periods
ordinary annuity
an annuity for which the cash flows occur at the beginning of each period
annuity due
an annuity in which the cash flows continue forever (ex. preferred stock)
perpetuity
Present value of a perpetuity formual
C/r
the interest rate expressed as if it were compounded once per year
Effective annual rate (EAR)
the interest rate charged per period multiplied by the number of periods per year
Annual percentage rate (APR)
to have a borrower pay the interest each period plus some fixed amount
amortizing
the borrower repays parts of the loan amount over time
amortized loan
amount you have left to pay on your loan
loan balance
