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10 Cards in this Set
- Front
- Back
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Define Remaining Balance |
multiply the contractual interest rate times the balance due on the loan |
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Define the Add-on method |
the total loan plus interest is added together and divided by the number of payments to be made |
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Define Discount Method |
total interest is paid up front (deducted from the loan amount) and then the principle is repaid |
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What are the 3 interest charges on loans? |
1. Remaining balance 2. Add-on method 3. Discount method |
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How do you calculate what $100 is worth in the future period? |
$100(1 + r) = value |
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How do you calculate what $100 is worth in two periods in the future? |
($100 (1 + r))(1 + r) = Value t+2 |
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How do you calculate what $100 is worth in three periods in the future? |
($100 (1 + r)^3) = Value t+3 |
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What if you want to calculate its value any number of periods in the future? What is it called? What is the general equation? |
($100 (1 + r)^n) = Value t+n Interest compounding (Value t (1 + r)^n) = Value t+n |
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What if you want to calculate the current value of a flow of money you will receive or pay in the future? What is it called? |
Value t = Value t+n / (1 + r)^n Discounting |
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Define the Internal Rate of Return |
the interest rate that causes the following formula to be equal to hold:
_T_ _E',_ ((Value n) / (1 + r)^n) = 0 n = 0 |
