Lecture 2 Flashcards
(24 cards)
Why is dollar today worth more than a dollar tomorrow
Money today can have intrest on it thus making it worth more
Intrest rate
As the measure of time value of money
Rate of return
What you expect to receive in future for your investment
Discount rate
Rate at which you sacrifice current consumption in exchange for future consumption
What is the future value of cash flow
FV = C * (1+r)^t
What happens when funds are longer invested
Greater compound intrest
Annuity
A stream of cash flows that occur yearly over given period
FV annuity =
C/r * ((1+r)^t - 1)
Present value of cash flow
PV= C / (1+r)^t
What is the discount factor
1 / (1+r)^t
PV annuity
C/r * ( 1- 1 / (1+r)^t)
Net present value (NPV) is ..
The difference between the present value of its benefits and the required investment
NPV 0 =
C 0 + PV 0
NPV rule
Accept investments with positive NPVs
Perpetuity
A stream of equal cash flow that occurs forever
PV perpetuity=
C / r
PV growing annuity =
C / (r-g) * ( 1 - (1+g/1+r)^t)
PV growing perpetuity =
C1/ r-g
Or
C0 * (1+g)/r-g
Effective annual rate EAR
Annual rate of return actually earned after adjustments have been made for different compounding periods
Annual percentage rate (apr)
Annualised interest rate without compounding
EAR =
(1+ periodic rate)^m - 1
M = number of compounding periods
To move cash forward you must …
Compound it
to move cash backwards you must ….
Discount it
When can values be added or subtracted
Values at the same point
