Chapter 7 Homework and Review Flashcards
Amortization Schedule
Illustrates the repayment of debt, over time. Each debt payment consists of both interest expense and principal repayment.
Annuity
A recurring cash flow of an equal amount that occurs at periodic (but regular) intervals.
Annuity Due Payment from a Lump-Sum Deposit
The payment that can be generating at the beginning of each period, based on a lump sum amount deposited today.
Future Value
The value at some point in the future of a present amount or amounts after earning a rate of return, for a period of time.
Future Value of an Annuity Due
The future value of equal periodic deposits, made at the beginning of the period.
Future Value of an Ordinary Annuity
The value of equal periodic payments or deposits, at some point in the future. The future value of an ordinary annuity assumes that deposits are made at the end of a period or end of a year.
Inflation Adjusted Rate of Return (IRR)
A compounded annual rate of return. IRR allows for the comparison of projects or investments with differing costs and cash flows. The rate that equals the PV of a series of cash flows to an initial investment.
Net Present Value (NPV)
Measures the excess or shortfall of cash flows based on the discounted present value of the future cash flows, less the initial cost or investment. NPV uses the investor’s required rate of return for similar projects as the discount rate.
Nominal Interest Rate
The actual rate of return earned on an investment
Ordinary Annuity
Occurs when the timing of the first payment is at the end of a period. The period may be, for example, the end of a month or the end of a year.
Ordinary Annuity Payment from a Lump-Sum Deposit
The payment that can be generated at the end of each period, based on a lump-sum amount deposited today.
Present Value
The value today of one or more future cash payments discounted at an interest rate.
Present Value of a Future Amount
The current value today of a future amount. The future amount is discounted over time using a discount rate(an interest rate that reflects the individual’s risk or opportunity cost that could be earned on a similar project or investment) to arrive at the present value.
Present Value of an Ordinary Annuity
Today’s value of an even cash flow stream received or paid over time. The present value of an ordinary annuity assumes that the first annuity payment is made at the end of a period.
Serial Payments
Payments that are adjusted upward periodically throughout the payment period at a constant rate, in order to adjust for inflation’s impact.
