Lecture 16 Flashcards
(7 cards)
1
Q
Account balance formula
A
2
Q
Types of cash flows
A
Single cash flow - future individual transaction
Multiple cash flows - unequal, annuity, perpetuity, growing perpetuity
3
Q
What is annuity?
A
Fixed cash flow received each year for specific number of years
4
Q
What’s the real life example of an annuity?
A
Mortgage or pension payments
5
Q
What factor determines the discount rate used?
A
Risk, inflation expectations, or comparisons with similar investments
6
Q
What’s compounding frequency?
A
How often interest is added, e.g. annually or monthly?
7
Q
Why do future cash flows have a lower present value?
A
Due to discounting – they’re worth less because of time, risk, and opportunity cost
