FP511 Module 4 Flashcards
PV (present value)
the value today of a single amount that will be received in the future when discounted (discounting) for a given number of periods at a given interest rate. This is known in time value of money terms as the PV of a single amount or the PV of a dollar.
FV (future value)
Future value of a single amount is the PV (present value) lump sum amount of the value to which it grows over a given period at an assumed rate of return
annuity
Often, as an individual identifies a future goal (such as retirement funding), the implementation of a systematic savings program is required to meet this goal. If these payments are equal and regular, this series of savings deposits or payments is called (in time value of money language) an annuity.
future value of an annuity
The accumulation of funds needed to meet a future financial goal is referred to as the future value of an annuity.
annuity due
If each of these payments is made at the beginning of each period (e.g., as with lease payments), the series of payments is known as an annuity due
ordinary annuity
if each of these payments is made at the end of each period (e.g., as with mortgage payments), the series is known as an ordinary annuity.
Rule of 72
to calculate the number of years for an investment to double in value, simply divide 72 by the annual interest rate. For example, if the client’s objective is to double a $1,000 investment that is earning a compound annual rate of return of 9%, it will take approximately eight years (72 ÷ 9 = 8).
Alternatively, if the investor wants to double his original investment in 10 years, divide 72 by 10 to derive an approximate required annual interest rate of 7.2%.
a fixed, or equal, payment.
Fixed (equal) payments are just that—unchanging over the entire period.
serial payment
Serial payments commonly mean payments increase each year by the amount of inflation (to maintain a constant or real dollar amount).
Amortization
Amortization refers to the repayment of loan principal over time
internal rate of return (IRR)
Average compound rate of return
compound return, also known as the internal rate of return (IRR), or for the PV of an asset.
Basically the average return given variable expenses or profits over time
Net present value
The difference between the total PV of the cash flows and the amount of the initial outlay (cost or investment) is the investment’s net present value (NPV).
PV of cash flows - cost of investment = NPV of investment
If the NPV is positive, it means that the investment would earn a return more than the discount rate (required rate of return). If the NPV is negative, it means the investor would earn a return less than the discount rate.
