Time value of moneny

Question 1

what are the assumption of time value problems?

Answer 1

1. Any interest or principal payments
   are paid at the end of the period(s)
   unless told otherwise.
2. Interest payments are reinvested at
   the original rate unless told
   otherwise. (continuous)
3. Periods are annual unless told
   otherwise.

Question 2

name the following:

a. PVA
b. FVA
c. FVAD
d. PVAD
e. PMT
f. PVP
g. PVDP
h. PVGA
i. PVGP

Answer 2

a. present value of an ordinary annuity
b. future value of an ordinary annuity
c. (Present) compound sum of an annuity due
d. (Future) discounted value of an annuity due
e. annuity payment or annuity receipt
f. present value of a perpetuity
g. present value of delayed perpetuity
h. present value of growing annuity
i. present value of a growing perpetuity

Question 3

what is an annuity?

Answer 3

a fixed sum of money paid to someone each year, typically for the rest of their life.

Question 4

What is another name for Annuity dues?

Answer 4

annuity in advance (usually in accounting)

Question 5

PVAD and FVAD Formulas:

Answer 5

PVAD = PVA [ (1 + r)^-(n -1)]
FVAD = FVA (1 + r)

Question 6

PMT of AD (payment of Annuity due)

Answer 6

PMT_of_Ordinary_Annuity / (1 + r)

Question 7

Find the Present Value of Growing Finite Ordinary Annuity, and Future Value of Growing Finite Ordinary Annuity.

Answer 7

PVGA = [(1 - ((1 + g) / (1 + r))^t) / (r - g)]

Question 8

Perpetuity is a special kind of annuity that goes on for ever.

a. Find PV of Perpetuity, and state an application of PVP
b. Find PV of delayed Perpetuity.

Answer 8

a. PVP = PMT / r
preferred stock valuation.

b. find the PVP at the time of the first payment, and then find the PV of that number. ( w/ t = time difference b/w now and the time of the first payment)

Question 9

Find the Present Value of a growing perpetuity, and its application.

Answer 9

PVGP = PMT / (r - g)

Gordon Growth Model, also known as the dividend discount model (DDM)

Question 10

Uneven Stream ( also known as mixed or irregular stream)

Answer 10

PV Mixed Stream = Sum (t, n = 1, CF_at_n (1 / (1 + r))^n)

elaboration = Sum (t, n = 1, (CF_at_n ) / ( 1 + r)^n)

Question 11

How to find the rate of return of uneven stream?

Answer 11

PP.
trial and error:
find the PV of each cash flow (stream) with a discounting rate

Question 12

What is EAR (AP), and what q does it answer?

Answer 12

pp
the Effective annual rate is the rate of interest actually incurred. it considers compounding.

EAR = (1 + (r_nominal / m))^m -1

r_nominal = stated annual rate of interest
m = # of compounding intervals per year.

Q: “What rate with annual compounding is just as good as the quoted rate with inra-year compounding”