class 3: future and present values of money

Question 1

nominal interest rate

Answer 1

interest ratebefore takinginflation or compounding into account

Question 2

Annual Percentage Rate (APR)

Answer 2

nominal interest rate

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

Question 3

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

Answer 3

𝐴𝑃𝑅 = 𝑟𝑡 ∗ 𝑛

𝑟𝑡: rate for the period

𝑛: number of periods

Question 4

The Effective or Equivalent Annual Rate or EAR

Answer 4

the actual rate you pay

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

Question 5

formula for EAR?

Answer 5

EAR = (1 + rt)^n – 1

Question 6

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

Answer 6

PV: Present Value

FV: future value

n: number of compounding periods

I: interest rate per period (discount rate)

pmt: payment

Question 7

future value of money

Answer 7

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

Question 8

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

Answer 8

𝐹𝑉 = 𝑃𝑉 ∗ (1+𝑟)^𝑛

Question 9

annuity

Answer 9

a fixed sum of money paid to someone each year

Question 10

how do you calculate the future value of an annuity?

Answer 10

𝑭𝑽𝑨 = 𝑷𝑴𝑻 ∗ ((𝟏+𝒓)^𝒏−𝟏)/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

Question 11

present value or discounted value?

Answer 11

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

Question 12

what is the formula to find PV (present value)

Answer 12

𝑃𝑉 = 𝐹𝑉 / (1+𝑟)^𝑛

Question 13

how do you calculate the present value of an annuity?

Answer 13

𝑷𝑽𝑨 = 𝑷𝑴𝑻 ∗ (𝟏−(𝟏+𝒓)^−𝒏) / 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

Question 14

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

Answer 14

multiply the PVA by (1 + r)

Question 15

net present value

Answer 15

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

Question 16

internal rate of return

Answer 16

Net present value is 0

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

Question 17

what is gross potential rent’

Answer 17

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

Question 18

effective rent

Answer 18

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