Chapter 13 - Financial mathematics Flashcards
1
Q
internal rate of return (IRR)
other names
A
- rate of return from an investment where there are a number of cash flows into and/or out of the investment
- calculated by finding the discount rate that will make the present value of the cash flows from the investment equal to the present value of the costs. discount rate will make NPV 0
other names:
- effective interest rate
- bonds = redemption yield (yield to maturity)
2
Q
net present value
A
calculate future inflows value in todays terms, this will give you the NPV sum of each years. NPV - what’s required today will indicate benefit.
a positive value is worth pursuing, whereas a negative one is not
3
Q
if the discount rate is higher above the crossover rate?
with the discount rate below the crossover rate?
A
investment B is more attractive - NPV is higher
investment A is more attractive - NPV is higher
4
Q
EAR =
A
(1+r/n)^n - 1
- where r is the rate of interest
- where n is the number of conversion periods a year
5
Q
FV =
A
PV x (1 + r)n
- where PV is presnet value
- where r is the rate fof return
- where n is the number of conversion periods
6
Q
PV =
A
FV / (1+r)^n
7
Q
APR v AER
=
A
- annual percentage rate and annual equivalent rate
- APR for loans
- AER for deposits
- APR = (1 + r/n)^n - 1
