chapter 5 Flashcards
in almost all multiple cash flow calculations, it is implicitly assumed that the cash flows occur at the _____ of each period
end
the annuity present value of an amount C is calculated as
C * {1-[1/(1 + r)^t] } / r
future value of an annuity factor equation
[ (1 + r)^t - 1 ] / r
an annuity due is a series of payments made
at the beginning of each period
if the interest rate is greater than zero, the value of an annuity due is always ______ an ordinary annuity
greater than
a perpetuity is a constant stream of cash flows for an ______ period of time
infinite
C/r is the formula for the PV of a
perpetuity
the effective annual rate takes into account the ______ of interest that occurs within a year
compounding
more frequent compounding leads to ____
higher EARs
annuity with payments beginning immediately rather than at the end of the period is called an
annuity due
if interest is compounded monthly, the _____ annual rate will express this rate as though it were compounded annually
effective
compounding during the year can lead to the difference between the ______ rate and the effective rate
quoted
APR =
periodic rate * number of periods per year
EAR =
(1 + APR/m)^m - 1 (m is # of compounds per yr)
suppose you can earn 1 percent per month on $1 invested today. what is APR? EAR?
APR = 1% * 12 = 12%
EAR = (1 + .12/12)^12 - 1 = 12.68%
if a t-bill promises to repay $10,000 in 12 months and the market interest rate is 7 percent, how much will the bill sell for in the market?
10,000/1.07 = 9345.79
