chapter 5: the time value of money Flashcards
future value or compound value
the value of a sum after investing over one or more periods
compounding
The process of leaving the money in the capital market and lending it for another year
each interest payment is reinvested
simple interest
the interest is not reinvested
discounting
process of calculating the PV of a future cash flow
the opposite of compounding
the present value factor
he factor used to calculate the PV of a future cash flow
the stated annual interest rate
the annual interest rate without consideration of compounding
nominal yearly interest
Annual percentage rate (APR)
effective annual interest rate (EAR)
yearly rate considering compounding periods per year
EAR is greater than the stated annual interest rate if more aha one period of compounding per year
continuous compounding
to compound every infinitesimal instant
C0 × e^(rT)
C0 is the initial investment
r is the stated annual interest rate
T is the number of years over which the investment runs
geometric series
never ending series of calculations
like perpetuity
growing perpetuity
never ending cash flows that grow each period
PV = C / (r - g)
perpetuity
never ending cash flows
C/r
An annuity
a level stream of regular payments that lasts for a fixed number of periods
among the most common kinds of financial instruments
a growing annuity
a finite number of growing cash flows
