Flashcards in Chapter 9 Deck (88)
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he principles and computations used to revalue cash paoffs at different times so they are stated in dollars of the same time period; used to convert dollars from one time period to those of another time period.
Time Value of Money (TVM)
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Time Value of Money (TVM)
The principles and computations used to revalue cash paoffs at different times so they are stated in dollars of the same time period; used to convert dollars from one time period to those of another time period.
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Cash Flow Timeline
An important tool used in time value of money analysis; a graphical representation used to show the timing of cash flows.
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Opportunity Cost Rate
The rate of return on the best available alternative investments of equal risk.
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Lump-Sum Amount
A single payment (received or made) that is made either today or at some date in the future.
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Annuity
A series of payments of equal amounts at fixed, equal intervals for a specified number of periods.
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Ordinary Annuity
An annuity with payments that occur at the end of each period.
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Annuity Due
An annuity with payments that occur at the beginning of each period.
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Uneven Cash Flows
Multiple payments of different amounts over a period of time.
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Future Value (FV)
The amount to which a cash flows will grow over a given period of time when compounded at a given interest rate.
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Compound Interest
When interest is left in an investment to earn additional interest.
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Cash Outflow
A payment, or disbursement, of cash for expenses, investments, and so forth.
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Cash Inflow
A receipt of cash from an investment, an employer, or other sources.
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Lump-Sum Equation
FVn= PV (1+r)^n
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Ordinary Annuity Equation
FVAn= PMT [(((1+r)^n) -1))/r]
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Anuity Due Equation
FVA(due)n=PMT{[(1+r)^(n-1)/4] x (1+r)}
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Payment (PMT)
This term designates constant cash flows-- that is, the amount of an annuity payment.
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Cash Flow (CF)
This term designates constant cash flows in general, including uneven cash flows.
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Terminal Value
The future value of a cash flow stream.
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Futre Value Cash Flow Equation
CF1(1+r)^(n-1) + CF2 (1+r)^(n-2)_
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Present Value (PV)
The value todeay-- that is, the current value-- of a future cash flow or series of cash flows.
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Discounting
The process of determining the present value of a cash flow or a series of cash flows received (paid)in the future; the reverse of compounding.
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Perpetuity
A stream of equal payments expected to continue forever.
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Consols
Perpetual bonds issued by the British government to consolidate past debts; in general, any perpituital bond.
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Annual Compounding
The process of determining the future (of present) value of a cash flow or series of cash flows when interest is paid once per year.
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Semiannual Compounding
The process of determining the future (or present) value of a cash flow or series of cash flows when interest is paid twice per year.
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Simple (Quoted) Interest Rate
The rate quoted by borrowers and lenders that is used to determine the rate earned per compounding period (periodic rate, rper)
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Annual Percentage Rate (APR)
Another name for the simple interest rate, rsimple; does not consider the effect of interest compounding.
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Effective (Equivalent) Annual Rate (R-ear)
The annual rate of interest actually being earned, as opposed to the quoted rate, considering the compounding of interest.
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