Chapter 4 Flashcards
(20 cards)
Present Value (PV)
The current value of future cash flows discounted by an appropriate discount rate
Future Value (FV)
The amount an investment is worth after one or more periods
r
interest rate
What is r called when calculating present value of a future amount?
discount rate
What is r called when it is the cost of borrowing?
Cost of capital
What is r called when you buy instead of save?
Opportunity cost of capital
What is r called when you want a certain growth before buying and investment?
Required return
Future Value General Formula
FV=PV(1+r)^t
where t=number of periods
Future value interest factor formula
(1+r)^t
future value without compounding (simple interest) formula
FV=PV+t * PV * r
present value formula
PV= FV/(1+r)^t
rate formula
r=(FV/PV)^(1/t)-1
number of periods formula
ln(FV/PV)/ln(1+r)
future value with continuous compounding formula
PVe^(rt)
Present value with continuous compounding formula
FV/e^(rt)
Real rate of return formula
r = [(1+ R)/(1+h)]-1
Where:
r = real interest rate
R = nominal stated rate
h = inflation
What is the name of the real interest rate formula
the Fisher equation
Effective annual rate with compounded interest formula
(1 + r/periods)^periods -1
discounting
Finding the present value of one or more future amounts. The reverse of compounding.
