fin 3000 exam 2
growing perpetuity
a growing stream of cash flows that continues forever
discounted cash flow
calculating the PV of a future cash flow to determine its value
_____________ is the popular Latin phrase very commonly used in economics and finance which translates to "other things equal"
ceteris paribus
ceteris paribus, as the time period increases, the present value
decreases
according to the rule of 72, you can do which one of the following
double your money in 5 years at 14.4 percent interest
________ is the interest rate expressed as if it were compounded once per year. it is the actual rate paid (or received) after accounting for compounding that occurs during the year
effective annual rate
simple interest
interest earned only on the original principal amount invested
mortgage loan
is secured by the collateral of some specified real estate property
future value
the amount an investment is worth after one or more periods
pure discount loan
the borrower receives money today and repays a single lump sum on a future date
present value
the current value of cash flows discounted at the appropriate discount rate
principal balance
the original loan amount
annuity due
if the first payment occurs at the beginning of the period. the first cash flow starts today. common examples are apartment rentals or some loan agreements
ordinary annuity
if the first payment occurs at the end of the period. the first cash flow starts one year from today
time value of money
refers to the notion that money is worth different values across time
this is true about interest rates
the effective annual rate equals the annual percentage rate when interest is compounded annually
Annual Percentage Rate (APR)
the interest rate charged per period multiplied by the number of periods per year. this is the annual rate that is quoted by law
growing annuity
a growing stream of cash flows with a fixed maturity
which one of the following accurately defines a growing annuity
a growing stream of cash flows with a fixed maturity
interest only loan
a loan that calls for periodic interest payments and a lump sum principal payment
amortized loan
a loan wherein each payment is equal in amount and includes interest and principal
annuity
a series of equal cash flows for a finite period of time
defines an annuity due
a series of equal cash flows for a finite period of time with the first payment occurring at the beginning of the period
perpetuity
an annuity in which the cash flows continue FOREVER.
which one of the following accurately defines a perpetuity
an annuity in which the cash flows continue forever
the interest rate that is most commonly quoted by a lender is referred to as the
annual percentage rate
interest earned on both the initial principal and the interest reinvested from prior periods is called:
compound interest
Effective Annual Rate (EAR)
the interest rate expressed as if it were compounded once per year. it is the actual rate paid (or received) after accounting for compounding that occurs during that year. this increases as the number of compounds increase
stated interest rate
the interest rate expressed in terms of the interest payment made each period, it is also known as the quoted interest rate. this is the rate quoted by the lender
amortizing
the process of providing for a loan to be paid off by making regular principal reductions
discount rate
the rate used to calculate the PV of future cash flows
discount
to discount a value means to calculate the PV of some future cash flow
