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19 Cards in this Set
- Front
- Back
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Interest Rate
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Rate of exchange between present values and future values
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What can interest rate also be known as?
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Required return
Cost of Capital Discount rate |
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Simple interest
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Interest earned only on the original principal amount/lump sum invested
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Interest on interest
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Interest earned on the reinvestment of previous interest payments
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Compound Interest
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Interest earned on both the initial principal and the interest reinvested from prior periods
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Future Value
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The amount an investment is worth after one or more periods
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As time increases, what does FV do?
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Increases
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Present Value
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The current value of future cash flows discounted at the appropriate discount rate
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As interest rate increases, what does PV do?
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Decreases
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Annuity
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Finite series of payments that occur at regular intervals
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What type of annuity is it when payments occur at the END of the time period?
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Ordinary Annuity
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What type of annuity is it when payments occur at the START of the time period?
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Annuity Due
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Perpetuity
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Infinite series of equal payments at regular intervals
An annuity in which the cash flows continue forever |
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What do you do to calculate the present value of a perpetuity that doesn't begin at t=1?
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Find the Present Value of the perpetuity - this would be one year before the perpetuity starts.
Discount back to t=0 |
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APR
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Annual Percentage Interest Rate
- The interest rate expressed in annual terms and qualified by the payment made each period |
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EAR
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Effective Annual Rate
- The interest rate expressed as if it were compounded once per year |
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Interest Only Loan
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- Borrow money, pay interest each period and repay entire principal (original loan amount) at some point in the future
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Amortised Loan
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- Paying off a loan by making regular principal reductions
Each payment covers that period's interest expense and also reduces the principal |
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Pure Discount Loan
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- The principal is repaid at a future date, without any periodic interest payments
Common in short term loans |
