Exam 1 Flashcards
Used to compute the present value of an annuity stream—all the payments are equal
PV
Used to compute the present value of unequal payments over time.
NPV
Used to compute annual “flat” payments on a loan
PMT
series of future cash flows is:
PV of the cash flows - initial investment required to obtain them
- gives the wealth increment (how much does the project’s net value add to your wealth?)
Net present value
An investment is worthwhile if its ___
When faced with two mutually exclusive investments, choose the one with the ___ NPV.
NPV>0 ; largest
is the discount rate for which the
NPV = 0
IRR
An investment is worthwhile if its IRR __ _____
> discount rate
- face a set of projects that can be taken at the same time, meaning they are not mutually exclusive.
- maximize the profit from the limiting resource.
Prioritizing projects using the Profitability Index (PI)
In every period, we pay the periodic interest on the loan. The principal is repaid at the end of the terminal year
Interest-only loan
In every period, the borrower repays an equal amount of the loan principal. The interest in each period is then paid on the outstanding principal at the beginning of the period.
Equal amortization term loan
Equal payments are paid in every period. The breakdown of the payments between interest and repayment of principal varies by period
Term loan (also called a “mortgage loan” or “an equal payment term loan“)
- periodic payments are relatively small over the years
- last payment of principal is large
- Interest is computed on the initial loan principal balance of every year.
Balloon loan
The borrower does not pay any interest or make any repayment of the loan principal until the last period
Bullet loan
present value of all remaining payments discounted at loan interest rate.
loan contract value
present value of all remaining payments discounted at market interest rate.
loan market value
