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. |
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