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