Chapter #4 Flashcards
What are the three cash flow patterns?
- Present Value Perpetuity
- Present Value Annuity
- Future Value Annuity
What is a perpetuity?
Equal cash flows that go on forever
How can we determine which PMT we are being asked to solve for?
By noting what the problem provides in terms of PV and FV
When given the annual withdrawals desired during the retirement period, what can PVA tell us?
The amount we should have accumulated by the time we retire
Given the amount needed at the beginning of the retirement period, what can the FVA give us?
The annual deposits needed during the working period
What does PMT in the PVA formula tell us?
The periodic mortgage payments for a fixed-rate fully amortized loan
How do you find the interest part of a fixed mortgage loan payment
Multiply the periodic interest rate by the beginning balance for a given period
What does more of the fixed payment go towards as we approach the end of the loan term?
The principal
How can we find the amount needed to pay off a mortgage loan at any point in time?
Solving for the PV of the remaining payments
What is the relationship between interest rates, PV, and PVP?
When IR increases, PV of each payment decreases, total PVP decreases
What is an annuity?
Equal periodic inflows/outflows that are definite
When is FV annuity typically used?
- Rent
- Lease
- Mortgage
- Car loan
When is PV annuity typically used?
- Nest egg needed prior to retirement
- Lump sum needed for college expenses
When is PVP typically used?
Consols, Stocks
How do you determine which of the 3 PMTs to solve for
- If “X” comes after payments –> Solve for FVA
- If “X” comes before payments –> Solve for PVA
