Chapter 5 - Discounted Cash Flow Valuation Flashcards
Understand: - How to determine the future and present value of investments with multiple cash flows. - How loan payments are calculated, and how to find the interest rate on a loan. - How loans are amortized or paid off. - How interest rates are quoted (and misquoted).
Definition: Annuity
A level stream of cash flows for a fixed period of time.
Definition: Annuities Due
An annuity for which the cash flows occur at the beginning of the period.
Definition: Perpetuity
An annuity in which the cash flows continue for ever.
Definition: Consol
A type of perpetuity
Definition: Nominal interest rate
The interest rate expressed in terms of the interest payment made each period. Also known as the “stated or quoted interest rate”.
Definition: Effective annual percentage rate (EAR)
The interest rate expressed as if it were compounded once per year.
Definition: Annual percentage rate (APR)
The harmonized interest rate that expresses the total cost of borrowing or investing as a percentage interest rate. –> APR in the US is called “the stated annual interest rate”.
