Chapter 5 Flashcards
Ordinary annuity
A level stream of cash flows for a fixed period of time.
Annuity due
An annuity for which the cash flows occur at the beginning of the period.
Annuity due Value = Ordinary Annuity Value * (1+R)
Perpetuity
An important special case of an annuity arises when the level stream of cash flows continues forever.
Perpetuity PV = C/r – (PV: Present Value, C: Cash Flow, r: Discount rate)
Effective annual rate
It is the real return on a savings account or any interest- paying investment when the effects of compounding over time are taken in account. It also reveals the real percentage rate owed in interest on a loan, a credit card or any other debt.
Annual percentage rate
The interest rate charged per period multiplied by the number of periods per year.
Interest-only loan
A repayment plan that calls for the borrower to pay interest each period and to repay the entire principal at some point in the future. Principal is paid all at once
Amortized loan
The lender may require the borrower to repay parts of the loan amount over time. The process of paying off a loan by making principal reductions.
What is a pure discount loan?
The borrower receives money today and repays a single lump sum at some time in the future. Principal is paid all at once