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