Exam 2 terms/concepts

consol

A type of perpetuity.

annuity due

An annuity for which the cash flows occur at the beginning of the period.

perpetuity

An annuity in which the cash flows continue forever.

annual percentage rate (APR)

The interest rate charged per period multiplied by the number of periods per year.

effective annual rate (EAR)

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

stated interest rate

The interest rate expressed in terms of the interest payment made each period. Also <em>quoted interest rate

quoted interest rate

The interest rate expressed in terms of the interest payment made each period. Also stated interest rate.

face value

The principal amount of a bond that is repaid at the end of the term. Also <em>par value.

Many people who want to start investing for their future want to start today, which implies an annuity stream that is paid at the beginning of the period. Beginning-of-period cash flows are referred to as:

annuities due

compounding

process of leaving your money and any accumulated interest in an investment for more than one period, thereby reinvesting the interest

coupon rate

the annual coupon divided by the face value of a bond.

When computing the rate of return from selling an investment, the number of years between the present and future cash flows is an important factor in determining:

the annual rate earned

simple interest

the interest is not reinvested, so interest is earned each period only on the original principal.

Your credit rating and current economic conditions will determine:

the interest rate that a lender will offer

indenture

the written agreement between the corporation and the lender detailing the terms of the debt issue.

bearer form

A bond issued without record of the owner's name; payment is made to whomever holds the bond

maturity

Specified date on which the principal amount of a bond is paid.

YTM

The rate required in the market on a bond.

registered form

The registrar of a company records who owns each bond, and bond payments are made directly to the owner of record.

coupon

The stated interest payment made on a bond.

annuity

a series of constant, or level, cash flows that occur at the end of each period for some fixed number of periods is called an ordinary annuity

When interest rates are lower, borrows can:

afford higher payments

discounted cash flow (DCF) valuation

calculating the present value of a future cash flow to determine its worth today

compound interest

compounding the interest means earning interest on interest,

The length of time of the annuity is very important in accumulating wealth within an annuity. What other factor also has this effect?

interest rate for compounding