Lyryx Lab 6 - Finance

Front 1

Effective annual rate (EAR)

Back 1

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

Front 2

Growing perpetuity

Back 2

A constant stream of cash flows without end that is expected to rise indefinitely.

Front 3

Perpetuity

Back 3

An annuity in which the cash flows continue forever.

Front 4

Stated or quoted interest rate

Back 4

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

Front 5

Annuity

Back 5

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

Front 6

calculation of fv when compounding occurs semiannually:

Back 6

we will divide the interest rate by two (the number of compounding periods in a year), and multiply the number of periods by two. Doing so, we get:
FV = PV × [1 + (r ÷ 2)] ^(t × 2)

Front 7

how to solve:

You just won the lottery. You will receive $1 million today plus another 4 annual payments that increase by $400,000 per year. Thus, in one year you receive $1.40 million. In two years, you get $1.80 million, and so on. If the appropriate interest is 5 percent, what is the present value of your winnings?

Back 7

find the PV of each lump sum and add them together.

Front 8

future value of an annuity (FVA) =

Back 8

C: Cash flow
r: Interest rate
t: Period
FVA = C × {[(1 + r)^t - 1] ÷ r}

Front 9

PVA: Present value of an annuity =

Back 9

C: Cash flow
r: Interest rate
t: Period
PVIFA(r,t) =
{1 - [1 ÷ (1 + r)t]} ÷ r