lecture 3: annuities, perpetuities, EARS, and Inflation Flashcards
definition of annuity
a series of constant cash flows that occurs at the end of each period for some fixed number of periods.
- the amount of cash flow is constant
- interest rate is known
- time period of saving/borrowing is known
definition of annuity due
an annuity for which the CFs occur at the beginning of the period
definition of perpetuities
an annuity in which the cash flows last forever
- useful for forecasting value of long-term investments
annual equivalent rate (AER) or Effective Annual Rate (EAR)..required to be quoted on–?
required to be quoted on all saving products in the UK
Annual Percentage Rate (APR) or Effective Annual Percentage (EAP)…required to be quoted on–?
required to be quoted on all borrowing products in the UK
what does APR or EAP cover?
- frequency of compounding
- any fees included in financing (financing costs)
(IF there is no fees included in financing, APR is calculate the same way as EAR)
what is core inflation?
inflation excluding the impact of foods and energy prices
definition of nominal interest rate
interest rate excluding the impact of inflation
definition of real interest rate
Interest rate after adjusted for the effect of inflation
can nominal interest rate be negative?
yes
does inflation affect PV(Present Value) calculations?
No
