Finance Chapter 6

Annuity

A level stream of cash flows for a fixed period of time.

Perpetuity

An annuity in which the cash flows continue forever

Consol

Another name for perpetuity

Most corporate Bonds are what type of loan?

Interest-Only Loan

Treasury Bills are what type of loan?

Pure Discount Loan

Bullet/Balloon

The amount must be paid when the time given to a borrower to make payments on a partially amortized loan has expired. Usually one large lump sum.

Interest-Only Loans

The borrower pays interest at the end of each period and pays back the entire principal at some point in the future.

Partial Amortization

A loan that is based on the borrower paying back a fixed month payment based on a x-period amortization. But is over an amount of time shorter than x. The amount that is left over is then paid back to the lender.

Growing perpetuity present value

C / r - g

Growing annuity present value

C x [ 1 -1+g / 1+r) / r - g ]

Annuity present value

C x {1 - [1/(1 + r)^t] / r }

Perpetuity PV

C/ r

Annual Percentage Rate

The interest rate charged per period multiplied by the number of periods per year. 1.2% per month; APR = 1.2% x 12

Effective Annual RateEAR)

The interest rate expressed as if it were compounded once per year.

Stated Interest Rate

The interest rate expressed in terms of the interest payment made each period. Also known as the quoted rate.

Amortizing a Loan

The process of providing for a loan to be paid off by making regular principal reductions.

Amortized Loan

the borrower repays part of the principle over time; along with interest.

Pure Discount Loans

the simplest form of loan. Borrower receives money today and repays a single lump sum at some time in the future.