Chapter 3 - The Time Value Of Money Flashcards
An understanding of interest is crucial to _____
Financial management
Simple interest
Interest earned or paid on the principle only
Compound interest
Is interest paid not only on the principal on any interest earned but not withdrawn during early periods.
Annuity
Is a payment or the receipt of a series of equal cash flows per period for a specific number of periods
Ordinary annuity
In this the cash flow occurs at the end of each period
Annuity due
In this the cash flow occurs in the beginning of each period
Formulas summary of future and present value equations
Look in photos
Page number 105
What are the two question we need to answer in solving financial mathematics problems
- Do we need a future value or a present value
2. Are we dealing with a single payment or an annuity
Sinking fund problems determine the
Annuity amount that must be invested in each year to produce a future value
Capital recovery problems
Determine the annuity amount necessary to recover some initial investment
The more frequently compounding occurs during a given period,
The higher the effective the interest rates on an investment
More frequent compounding results in
Higher future values and lower present values than less frequent compounding at the same interest rate.
The appropriate compounding or discount rate to use a particular decision making decision situation depends upon
The general level of interest rates in the economy , the time frame used for the analysis and the risk investment being considered.
The _______ _____ rule is central to financial analysis
Net present value
The net present value (NPV) of an investment in equal to the
Present value of the future cash flows - the initial outlay.
