Exam 2 Flashcards
What are the Fundamental Variables of Time Value of Money
Rate of interest (I/V)
Number of Periods (N)
Future Value (FV)
Present Value (PV)
Payment (PMT)
How do you find the Future Value of a Lump Sum
(PV)(1+i)^n or plug the present value, periods, and interest into your calculator
What is Interest (in the context of debt)
The payment for the use of money, it is the excess cash received above the amount lent or borrowed.
What is Simple Interest
Interest on the amount of the principle only. Return on principle for one period
How do you calculate Simple Interest
P x I x N
Periods x Interest x Number of periods
What is compound interest
Interest on the principle plus any interest already earned that has not been withdrawn
How do you calculate compounded interest
Multiple principle by the interest for one period. The next period will multiple the principle + the interest earned by the interest rate again and so on.
What is the effective yield
The effective yield is the interest rate when it is compounded to a certain degree. (daily, monthly, semiannually).
How to calculate effective yield
(1 + i)^n - 1
one plus the interest rate raised to the nth power and then subtract everything by 1.
What’s an annuity
An annuity is a series of periodic payments of the same amount, the same length interval between these rents, and the compounding of interest once every interval
What is the future value of an annuity (Words)
The sum of all the rents plus the accumulated compounded interest on them
What is the difference between an ordinary annuity and an annuity due
If the rents occur at the end of the period it is an ordinary annuity, if the rents occur at the beginning of the period then it is an annuity due.
How to calculate the future value of an ordinary annuity
to calculate the future value of an ordinary annuity you need to calculate the future value of every individual payment and add the sum or use the calculator
How to calculate the future value of an annuity due
You need to calculate the future value of every payment and add the sums but remember that an annuity due has a payment at year zero and not year one so interest starts earlier. Beginning mode of calculator
How to calculate Present value of an ordinary annuity
The present value of the series of payments, every payment will be getting discounted if going to year zero.
How to calculate present value of an annuity due
The present value of the series of payments, every payment but the first payment will be getting discounted if going to year zero
What are the cashflows that a bond produces
Interest payments and the maturity date principle
The different between the market rate and the bond rate
The market rate is the price the market is asking for and it is considered the discount rate, The bond rate is the coupon rate which determines the amount of the interest payments
What are the components of interest?
the pure rate or the risk free rate, expected inflation and the credit risk rate of interest.
What are some examples of cash?
Coin’s, currency, available funds on deposit, certified checks, personal checks, bank drafts, and savings.
What are cash equivalents?
They are short term highly liquid investments that can be readily converted to cash and so near their maturity date that they present no significant risk of change in value.
What are some examples of cash equivalents
Treasury bills, commercial paper, and money market funds
What is restricted cash
cash that is put aside to pay for an obligation or otherwise saved up for some purpose.
Examples of restricted cash are?
Plant expansions, retirement of long term debt, compensating balances
