financial management chapter 5

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

DISCOUTNED CASH FLOW (DCF) VALUATION

an annuity for which the cash flows occur at the beginning of the period

annuity due

the current value of future cash flows discounted at the appropriate discount rate

present value

what kind of loan is common when the loan term is short-say a year or less

pure discount

two types of loans

pure discount and interest only. amortizing loans is an alternative when it comes to paying them back

what is the simplest form of loan

pure discount loan

when the browser receives money today and repays a single lump sum at some time in the future

pure discount loan

in this type of interest, the interest is not reinvested, so interest is earned each period only on the original principal

simple interest

what kind of interest rate would a lender want to use

a compounding rate. because you want monthly payments not yearly like an EAR

the lender requires the borrower to repay parts of the loan amount over time

amortized loan

the process of providing for a loan to be paid ff by making regular principal reductions is called

amortizing the loan

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

compounding

a type of perpetuity

consol

a type of loan repayment when the borrower to pay interest each period and to repay the entire principal at some point in the future

interest only loans

compounding the interest means earning interest on

interest, so we call the result compound interest

if there is just one period, which two types of loans are the same thing

interest-only and pure discount

time and present value of money are ___________ related

inversely

an annuity for which the cash flows occur at the end of the period

ordinary annuity

annuity in which the cash flows continue forever

perpetuity

example of a perpetuity

preferred stock. a corp sells it and the buyer is promised a fixed cash dividend every period forever. they will be paid first