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32 Cards in this Set
- Front
- Back
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future value equation
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principle * interest rate
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PV equation
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discount factor (1/(1+r)) x C1
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NPV
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PV equation that considers the initial investment
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rate of return
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profit/initial investment ((FV-I)/I)
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expected value
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(weighted average)
sum of percentage return * chance (chances should equal to 100) |
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when do firms accept projects?
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(when projects have + NPVs or PVs valued greater than the initial invesmtn.
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discount rate
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discount rate, hurdle rate, opportunity cost of capital
takes into account the risk free rate of return (what you can get in the market) |
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C0 fashflow
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it is always negative
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how is discount rate determined
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rates of return that prevail in market. if future cash flow is absolutely safe, then the discount rate is is the interest rate on safe securities such as US government debt
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why are cashflows discounted
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a dollar today is worth more than a dollar tomm
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two things to remember about a perpetuity
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1. the denominator is only r, not 1+r
2. the equations provides a PV that will provide a stream of money 1 year from now. in order to fund something now, you would have to provide the initial money upfront |
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APY
how to calculate |
the amount of money someone actually gets paid (borrower paying a lender)
interest calculation -1 |
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bid price of a bond
ask price for a bond bid-ask |
bid- buying price
ask-selling price profit for bond dealer |
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coupon rate
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interest rate on bond
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how to calculate the value of a bond
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PV, NPV, annuity factor
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when r for govt bonds goes up, how much more or less willing are you to buy a corp bond
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as r increased, likeihood decreases
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bonds are counter cyclical
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they are valued less when the market is doing well
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T bills
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short term govt loan that matures in less than a year
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how to calculate a bond with semiannual payments
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5% coupon rate= 2.5
4% rf rate= 2 8 yr maturity= 16 periods |
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current yield
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coupon rate/price (what you pay)
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discounted cash flows that are away from year 1
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#1 HW 4 example (multiply by the discount rate raised to the power of that year)
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perpetuity with a growth rate
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c/(r-g)
dont forget to bring it to the app year if neccesary |
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IRR
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rate of discount that makes NPV=0
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payback rule (regular or discounted)
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considering when you get your initial investment back
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profitability index
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NPV/I
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real vs nominal interest rates
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nominal=includes inflation
real=adjusted for inflation |
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to go from nominal to real
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1+nominal/1+inflation -1= real rate
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sunk costs and the future
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ignore sunk costs when going into the future- it is gone
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SL depreciation
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price-salvage/usable life
calculates loss of value over time |
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equivalent annual cost example
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building 1 and 2. use annuity equation to solve.
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soft managing
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management decides how much to invest
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hard managing
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financial limitations restrict your investment options
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