FIN 300
Which of the following is a similar concept to the compound growth rate of money?
-The yield on a bond -The discount rate on a capital budgeting project. -The internal rate of return on an investment.
Annuity
A series of equally-spaced and level cash flows extending over a finite number of periods
perpetuity
A series of equally-spaced and level cash flows that continue forever -social security
Perpetuity
A stream of equal cash flows that goes on forever Preferred stock and some bonds Equation for the present value of a perpetuity can be derived from the present value of an annuity equation
Present Value of Annuity Due
Cash flows are discounted for one period less than in an ordinary annuity
Future Value of Annuity Due
Cash flows are earn compound interest for one period more than in an ordinary annuity
Identify the steps involved in computing the future value when you have multiple cash flows
Draw a timeline to determine the number of periods for which each cash flow will earn the rate-of-return Calculate the future value of each cash flow using Equation 5.1 Add the future values
Loan Amortization
How borrowed funds are repaid over the life of a loan Each payment includes less interest and more principal; the loan is paid off with the last payment Amortization schedule shows interest and principal in each payment, and amount of principal still owed after each payment
Describing interest rates
The most common way to quote interest rates is in terms of annual percentage rate (APR). It does not incorporate the effects of compounding. The most appropriate way to quote interest rates is in terms of effective annual rate (EAR). It incorporates the effects of compounding.
Finding the interest rate
The present value of an annuity equation can be used to find the interest rate or discount rate for an annuity To determine the rate-of-return for an annuity, solve the equation for i
Ordinary Annuity versus Annuity Due
The present value or future value of an annuity due is always higher than that of an ordinary annuity that is otherwise identical
present value of an annuity
amount needed produce the annuity current fair value or market price of the annuity amount of a loan that can be repaid with the annuity
annuity due
cash flows occur at the beginning of a period -bills like SRP, money up front for service
ordinary annuity
cash flows occur at the end of a period -bond
Using lower interest rates will
decrease the future value of any investment.
The amount borrowed on a loan equals the
discounted value of the loan payments
Growing Annuity
equally-spaced cash flows that increase in size at a constant rate for a finite number of periods -Multiyear product or service contract with periodic cash flows that increase at a constant rate for a finite number of years
Growing Perpetuity
equally-spaced cash flows that increase in size at a constant rate forever -Common stock whose dividend is expected to increase at a constant rate forever