class 3: future and present values of money Flashcards

1
Q

nominal interest rate

A

interest ratebefore takinginflation or compounding into account

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2
Q

Annual Percentage Rate (APR)

A

nominal interest rate

same as Stated Rate, Quoted Rate or Advertised Rate on a loan

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3
Q

what is the calculation of the APR or nominal interest are)

A

𝐴𝑃𝑅 = π‘Ÿπ‘‘ βˆ— 𝑛

π‘Ÿπ‘‘: rate for the period

𝑛: number of periods

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4
Q

The Effective or Equivalent Annual Rate or EAR

A

the actual rate you pay

takes into account the fact that we will pay interest on the interest (compounding)

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5
Q

formula for EAR?

A

EAR = (1 + rt)^n – 1

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6
Q

what are the five variables of the time value of money (TVM)

A

PV: Present Value

FV: future value

n: number of compounding periods

I: interest rate per period (discount rate)

pmt: payment

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7
Q

future value of money

A

how much a given amount of money today will be worth at a future date

the amount of money invested today plus the interest that money will earn

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8
Q

what is the formula to find FV (future value of money)

A

𝐹𝑉 = 𝑃𝑉 βˆ— (1+π‘Ÿ)^𝑛

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9
Q

annuity

A

a fixed sum of money paid to someone each year

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10
Q

how do you calculate the future value of an annuity?

A

𝑭𝑽𝑨 = 𝑷𝑴𝑻 βˆ— ((𝟏+𝒓)^π’βˆ’πŸ)/𝒓

FVA = the future value of an annuity stream

PMT = the dollar amount of each annuity payment

r = the interest rate

n = the number of periods in which payments will be made

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11
Q

present value or discounted value?

A

is how much a given amount of money received on a future date is worth in today’s dollars

the amount of money that must be invested today to equal the amount of cash received on a future date

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12
Q

what is the formula to find PV (present value)

A

𝑃𝑉 = 𝐹𝑉 / (1+π‘Ÿ)^𝑛

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13
Q

how do you calculate the present value of an annuity?

A

𝑷𝑽𝑨 = 𝑷𝑴𝑻 βˆ— (πŸβˆ’(𝟏+𝒓)^βˆ’π’) / 𝒓

PVA = the present value of an annuity stream

PMT = the dollar amount of each annuity payment

r = the interest rate

n = the number of periods in which payments will be made

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14
Q

how do you calculate present value of annuity if it is received at the beginning of the period?

A

multiply the PVA by (1 + r)

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15
Q

net present value

A

Find the present value of the cash flow of your investment

See how much you’re going to spend today

The net present value is the present value of the cash flow – the money spent on investment

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16
Q

internal rate of return

A

Net present value is 0

The rate of return’s present value is the same as the investment

17
Q

what is gross potential rent’

A

the potential rent revenue a property could generate if the occupancy was at 100%

18
Q

effective rent

A

the total amount of net rent that a tenant pays over the term of the lease