Chapter 5 - Time Value of Money Flashcards
What is the formula to discount €100 back to present value?
€100/(1+i)^n
What is the IRR/Yield-to-maturity?
Interest rate that makes all the payments you get when purchasing the bond equal to the face value
How do you evaluate an investment with the discounting formula?
V=−set-up expenses+CF1/(1+i)+CF2/(1+i^2)+CF3/(1+i^3) … CFn/(1+i)^n
What is the value of a bank loan?
Summation of the discounted cash flows: CF1/(1+i)^1 + CF2/(1+i)^2+CF3/(1+i^3) … CFn/(1+i)^n
What is the formula to calculate a loan with constant annuities?
a = E*((i)/1-(1+i)^-n)
How do you calculate the value of a bullet loan?
E+i = E*(1+r)^n
What is perpetual annuity (perpetuity)?
A bond or other securities with no ending date.
How do you calculate perpetuity?
E=a∗(1−(1+r)^(−n))/r
What is the present value of perpetual debt with a constant coupon?
E = C/r
How do you calculate the value of fixed rate debt?
En = r0/rn
If the rate goes up, the market value of the fixed rate debt goes down.
If the rate goes down, the market value of the fixed rate debt goes up.
What is ment by income risk?
If the interest of a floating rate loan changes, there is a possibility of the rate increasing/decreasing and depending on your position it is an income risk.
What is ment by price risk?
When the market interest rate of a fixed loan changes the market value of the bond changes. If the market rate increases, the bond decreases in value.
How do you calculate the EAR?
(1+r)^1/12 - 1
How do you calculate the APR?
r/12
