Module 3 Flashcards
why is there TVM?
- today’s money can be inv to earn interest
- today’s money has no uncertainty of its receipt
- today’s money can be spent before inflation reduces its buying power
what are some cash flow patterns?
single amount (lump sum) annuity (equally spaced, level) mixed stream (series of unequal periodic CF)
what does the PV measure?
it measures what a CF received in future is worth today
what is discounting?
calculating the PV
what do present value calculations show you?
how much you need today in order to achieve your future financial goals
the higher the discount rate…
… the lower of PV
what is total int on int?
int minus simple interest
when would a bus need to calc the PV of something?
- determining the val of a security
- deciding whether to make a capital investment
what is a perpetuity?
this is a constant stream of level and equally spaced cash flows that goes on for an infinite period
what is a growing perpetuity?
refers to CF that grow at a constant rate indefinitely
example of periodic int rate?
interest per month / day / week
two ways that int rates can be quoted?
annual percentage rate
periodic int rate
what is the effective annual rate?
it is the int rate that takes compounding into account
