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20 Cards in this Set
- Front
- Back
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Future value
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The value that an amount today will be worth at a certain point in the future.
Apply the interest rate to the principle. FV = PV x (1 + r). r=interest rate FV = PV x FV factor |
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Simple interest
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Interest earned only on the original amount invested.
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Compound interest
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Interest earned on the original amount invested plus previously earned interest.
FV = PV x (1 + r)n. n=number of periods. |
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Number of interest payment periods is important
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FVn = PV x [(1 + (r / m)] n x m
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Effective annual interest rate
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EAR - The rate of interest that reflects the effect of compounding more than once a year.
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Standard interest rate
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The quoted annual rate of interest that does not take account of the frequency of compounding.
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Present value
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The value today of money that will be received in the future.
PV = FVn / (1 + r)n PV = FVn x PV factor |
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Discounting
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The process of calculating the present value of a future amount.
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Discount rate
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The interest rate on loans made by Federal Reserve Banks to depository institutions.
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Rate of return
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PV = FVn / (1 + r)n
To figure ROR (1 + r)n = FVn / PV |
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Annuity
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A series of fixed payments made on specified dates over a set period.
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Ordinary annuity
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A series of equal periodic payments made at the end of each period.
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Future value of an ordinary annuity
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Equal to the total of the future values of each of the payments made or received.
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Present value of an ordinary annuity
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The value today of a series of equal payments to be made or received in the future at the end of each specified period.
PVA = A x PVAF A = payment period PVAF = table value |
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Annuity due
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A series of equal periodic payments made at the beginning of each period.
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Future values of an ordinary annuity and an annuity due
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FV (Annuity due) = FV (Ordinary annuity) x (1 + r)
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Present values of an ordinary annuity and an annuity due
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PV (Annuity due) = PV (Ordinary annuity) x (1 + r)
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Perpetuity
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A series of fixed payments made on specified dates over an indefinite period.
PVP = A / r A = payment per period r = discount rate |
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Present value of unequal payments
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PV = 1 / (1 + r)n
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Net present value
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NPV - The present value of all future net cash flows (including salvage value) discounted at the cost of capital, minus the cost of the initial investment, also discounted at the cost of capital.
If the value is positive an investment should be made. NPV = C0 + (Ct / (1 + r)t) #FAIL |
