TVM - Discounted Cash Flow Valuation

Question 1

Annuity

Answer 1

Finite (limited) series of equal payments that occur at regular intervals

• If the first payment occurs at the end of the period, it is called an ordinary annuity
• If the first payment occurs at the beginning of the period, it is called an annuit due

Question 2

Perpetuity

Answer 2

Infinite (unlimited) series of equal payments

Question 3

Growing perpetuities

Answer 3

Have cash flows that grow at a constant rate and continue forever

Question 4

Stated interest rate

Answer 4

-> quotes or nominal rate

• interest rate expressed in terms of the interest payment made each period

Question 5

Effective annual rate (EAR)

Answer 5

The interest rate expressed as if it were compounded once per year

Question 6

Annual percentage rate (APR)

Answer 6

The annual rate that is quoted by lenders on
loan/mortgage documents required by law

Question 7

Two types of amortized loans

Answer 7

1. The borrower pays the interest each period
   plus a fixed amount towards the principal. Loading…
2. The borrower makes a single fixed payment each period. A portion of each payment goes to interest and a portion goes to principal.