Module 2 Flashcards
Discount Rate
Rate of return used to equate amounts of money received in different periods
When is Arithmetic Mean used and when is geometric mean used
Arithmetic mean is used to calculate return accross investment and Geometric mean is used to calculate return from one investment over time
APR (Annual % Rate)
Conventional method of quoting interest rate that ignores the coumpounding effect completly
EAR (Effective Annual Rate)
Counmounds the periodic rate the # of times they are periods in the year
Ordinary annuity
Payment made at the end of the period. Also deffered annuity
Annuity due
Payment made at the beg of the period
Interest Rate
Price to borrow money
4 factors that influence the discount rate
1) Pure time premium
2) Risk
3) Income Tax
4) Inflation
What is pure time premium?
Compensation for deffering the use of money
Inflation
General rise in price of all goods and services. Important because we plan for a level of consumption rather than a fix amount
What are the 2 methods used to account for inflation
- current dollars
- constant dollars
Current dollars (inflation)
Found by inflating every $ measure for every year of the plan by the rate of inflation expected to occure
Constant dollars (inflation)
Discount all future amounts back to today’s $
3 steps in making a budjet using the constant $ method
1) Calculate the real rate of return
2) Calculate the budjet in real $
3) Translate to nominal $
Nominal Rate
Discount rate for inflated or current $
