Chapter 4: Time Value of Money

Question	Answer
Compounding is the process...	of determining FV of a cash flow. FV = PV(1+I)
Discounting is the process...	of determining the PV of a future cash flow. PV=FV/(1+I)
Annuity	Equal periodic payments for a number of periods.
Ordinary Annuity	An annuity payment due at the end of the period.
FVA	Future Value of an Ordinary Annuity FVA=PMT[(1+I)/I-1/I]
Annuity Due	An annuity payment due at the beginning of the period.
Perpetuity	An annuity with an infinite number of payments.
PV or FV of an uneven series	Find the Pv or FV of each cash flow and then sum them.
Determine Interest Rate	Solve for interest in PV or FV equation.
Nominal Rate	The quoted rate. Don't use for frequent compounding, use period rate.
Periodic Rate	Nominal rate / Number of periods in a year Used in timeline and in calculations.
Effective Annual Rate (EAR) aka Effective Percentage (EFF%)	The annual interest rate that produces the SAME FINAL AMOUNT as compounding at the periodic rate for M times per year.
When is EFF% used?	To COMPARE the effective COSTS of different loans or ROR on different investments when payment periods differ.
An amortized loan is paid off..	With equal payments over a specific period.
A "growing annuity" is a...	Stream of cash flows that grows at a constant rate for a specific number of years.

Resource summary

	Created by L F almost 7 years ago