Chapter 6 Flashcards
What does financial math deal with?
study of how money changes over time e.g. saving, investing, loan repayment
What is cash flow
the pattern of money going in and out over time e.g. regular savings, payments
What is Pt
amount of money P available at time t
What is It?
amount of interest I that exists at time t
What is i?
interest rate
What is q?
interest factor
q=1+r
What is n?
periods in total
what is interest
price paid for capital investment or capital transfer or price to keep certain amount of money at a bank
What is simple interest?
interest paid for the transfer of initial amount
Interest= Principal * Rate* Time
What is compound interest?
interest paid for transfer of initial amount and interest due at the end of each period
What is mixed interest?
combo of simple and compound interest
What is nominal interest?
annual interest rate not accounting for compounding, which is broken down into smaller periods (mothly,quarterly)
What is effective annual interest rate?
the actual interest earned or paid in a year, including compounding
what is continuous rate?
interest that is compounded continuously over time
What is equivalence principle
money at different times can be made equal using interest.
What is price calculation used for?
to understand securities markets, yield calculation, depreciation calculation, financing/investment calculation
What is annuity calculation?
deals with the development of savings assets with regular payments.
payments are called annuities
What is the symbol for annuity rate or installment
PMT
What is the annuity calculation called if the installment is due at the beginning of period?
annuity in advance
What is the annuity calculation called if the installment is due at the end of period?
deferred annuity
What is the symbol for final annuity value?
FVn
What is amortization
repayment of debt in installments
What is the payment called that the debtor has to come up with monthly/ annualy
annuity
What does annuity consist of?
repayment installment- the part that pays loan itself
interest- part you pay lender for borrowing money
What is residual debt?
amount left to pay at any given time
What are the two types of ways to pay amortization?
installment debt- pay back same amount of loan each time, interest gets smaller over time
pros: pay less overall, save money in the long rung
cons: higher payments in the beginning
annuity payment- pay same total amount every time, first payment goes to interest then the actual loan
pros: easier on the budget
cons: pay interest overall
What type of amortization is common?
annuity payment
it is offered as an alternative to a one-time residual amount to be paid at the end of term, especially on mortgage loan
What is one time residual amount
-large final payment at end of loan term after making smaller regular payments
-the remaining unpaid loan balance
What is financial processes?
the ways money moves or changes over time e.g. spending, saving, interest earned
What is an annuity?
Sequence of equal payments at equal amount of time
How to calculate term of loan in amortization?
T= P0/n
Term= Principal Loan/ Credit Period
How do you calculate future value of annuity?
FVn=PMT * (q^n-1)/ r
How do calculate the installment rate in annuity?
PMT=FVn*r/q^n-1
