Chapter 5 And 6

Question 1

Future value (FV)

Answer 1

Cash value of an investment at some time in the future

Question 2

Compound interest

Answer 2

Compound interest is when we earn interests also on interests, process is called compounding

Question 3

Compounding interest formula

Answer 3

FV = C0 * (1+r)^t

Question 4

Present value

Answer 4

PV = FV / (1+r)^t

Question 5

What is present value of future cash flow called?

Answer 5

Discounted cash flow (DCF) valuation

Question 6

Discount (or interest) rate, (rate of) return

Answer 6

r = (FV/PV)^1/t - 1

Question 7

Lump sum

Answer 7

an amount of money that is paid in one large amount on one occasion

Question 8

Annual percentage rate (APR)

Answer 8

The Annual Percentage Rate (APR) is a measure of the interest rate plus the additional fees charged with the loan.

APR=m*r

Question 9

Effective Annual Rate (EAR)
Annual Percentage Yield (APY)

Answer 9

The true interest that is being charged or earned.
EAR=(1+(r/m))^m - 1
EAR=(1+(APR/m))^m - 1

Question 10

Differences between APY and APR

Answer 10

APY: determines what you earn; used to calculate what you can earn on your money on deposited accounts; computes using compound interest; the higher the APY the higher the total return on investment.

APR: determines what you pay; used to calculate the cost of borrowing for loans or credit cards; calculated with any fees or charges; the lower the APR the less extra you pay out of your pocket.

Question 11

Differences between APY and APR

Answer 11

APY: determines what you earn; used to calculate what you can earn on your money on deposited accounts; computes using compound interest; the higher the APY the higher the total return on investment.

APR: determines what you pay; used to calculate the cost of borrowing for loans or credit cards; calculated with any fees or charges; the lower the APR the less extra you pay out of your pocket.

Question 12

Perpetuity

Answer 12

A perpetuity is a constant steam of identical cash flows with no end, also called consols

Question 13

Present value of perpetuity

Answer 13

PV = C/r

Question 14

Annuities

Answer 14

An annuity is a series of constant cash flows that occur at the end of each period for some fixed number of periods

Question 15

Present value for annuity cash flows

Answer 15

PV = C/r * (1-(1/(1+r)^t))

Question 16

Future value for annuities

Answer 16

FV = PV * (1+r)^t = C/r * ((1+r)^t -1)

Question 17

Future value for annuities

Answer 17

FV = PV * (1+r)^t = C/r * ((1+r)^t -1)

Question 18

Growing perpetuities

Answer 18

Growth rate denoted by g
PV=C/r-g

Question 19

Pure discount loan

Answer 19

Simplest form if loan, the borrower receives money today and repays simple lump at the end

Question 20

Interest only loan

Answer 20

The borrower pays interest each period and repays the original amount at the end.

Question 21

Amortized loans

Answer 21

The borrower pays interest and parts of the principal amount in each period. 2 basic types:
Evenly (fix) principal portions: the principal portions of the loan repayment are fixed and interest portions are changing every period.

Annuity repayments: the repayments are fixed