Week 2 - Investment and time Flashcards
What are the two types of interest?
And how do they differ?
- Simple and compound
- Simple: Interest (i) paid (earned) only on the original amount (principal - P) borrowed (lent)
- Compound: Interest paid (earned) on the principal borrowed (lent) as well as any previous interest earned
Formulae for simple interest
Formulae for compound interest
Formulae for return
What are the types of cash flows?
- What table is FV of a lump sum?
- What table is FV of an annuity?
- What causes a high FV? (except the amount)
- 1
- 2
- higher interest rate + number of periods (further into the future)
When is compounding used instead of discounting?
- Future Value = compounding
- Present Value = discounting
Which tables show discounting factors for (1) lump sum (–>PV) (2) ordinary annuity (–>PV)
3 + 4
What is a perpetuity?
give an example
what is the formulae?
- Cashflow without a fixed time horizont
- 1000 per year forever
- PV=CF/i
What decide the size of the present value?
- interest rate + number of periods
- high i –> low PV
- high n –> Low PV
What is intra-year compounding?
What is the formulae for continuous compounding?
What is deffered annuities?
What is the difference between regular annuities and annuity due?
When doing Loan Amortization what formulae should you use?
And how do you get to the Payment CF from there?
And what does it show?
- PVA (present value of an ordinary annuity)
- amount/discounting factor
- Given the i and n, what is the stream of payments (cash flows), that equals, in PV terms, the value of the loan
Difference between effective and periodic rate?
What is the APR?
- how does the APR graph look like?
- Annual Pertage Rate
- APR is the equivalent interest rate considering all extra costs –> its the net effective cost of borrowing
- Seek the loan with the lowest APR
HOWEVER, APR can include (exclude) any costs in its calculation (so in essence it is a subjective figure)
- So it is not a good starting point for choosing a loan
