chapters 4 and 5 Flashcards
a dollar today is worth more than a dollar promised at any time in the future
time value of money
interest made only on the original principle
simple interest
interest is made on the principle plus prior interest
compound interest
this equates present value to a future value at any given rate of time
number of periods
a valuation method used to evaluate the attractiveness of an investment opportunity
discounted cash flow
which variables do you use to calculate a lumpsum
N, I, PV, FV
which variables do you use to calculate a lumpsum with payments
N, I, PV, PMT
which variables do you use to calculate for payments now and a lump sum later
N, I, FV, PMT
a finite series of equal payments at regular intervals
annuity
what is it called when the 1st payment occurs at the end of the period
ordinary annuity
what is it called when the 1st payment occurs at the beginning of the period
annuity due
an infinite series of equal payments
perpetuity
what is the formula for perpetuity
PV = PMT/I
borrower receives money today and pays back a lump sum in the future
Pure Discount Loan
borrower pays interest only, until the end, then pays principle
Interest Only Loan
pay a combo of principal and interest over the life of the loan
Amortized loan
what is the formula for an annual percentage rate
APR = Periodic Rate x Number of periods
the rate expressed as if compounded once per year
Effective Annual Rate
the process of paying off loans regularly by reducing the principle (also has interest)
Amortization
the process of accumulating interest in an investment over time to earn more interest
compounding
why is a dollar received today worth more than a dollar received in the future
can be reinvested and also b/c inflation will make future worth less
calculating the PV of future cash flow to determine its worth today is commonly called….
discounted cash flow valuation
the amount an investment is worth after one or more periods
future value
with discounting, the resulting value is called
present value
while compounding, the result is called
future value
current value of an amount to be received in the future
present value
a way for investors to approximate how long it will take them to double their money at a given interest rate
Rule of 72 (72/Interest Rate)
