TVM Flashcards
(28 cards)
tvm
the difference in value between money in hand today and money promised in the future.
money in the present is worth more (and thus preferred) than the same sum of money to be received in the future
money can increase in value because of interest earned from the investment over time.
investment
investment has a yield to return
investment depends on the size and timing of cash flows associated with investment
the larger the cash inflows and sooner the receipt of cash flows, the more valuable the investment.
interest
amount paid for money borrowed
OR
amount received for money invested
repo rate
rate at which south african reserve bank lends money to commercial banks
prime rate
basic interest rate that commercial banks charge their clients when loaning money
real rate of interest
interest that has been adjusted for inflation, reflecting the real cost of funds to borrower
risk premium
banks evaluate every borrower and add percentage points to overalll rate to be charged.
If you are considered a risky borrower, you will be charged more than someone who is considered less risky.
lump sum
single amount that is borrowed or invested (made/received) t that occurs either today or in the
future
if we want to find the
Future Value, we
compound, If we want to find the
Present Value, we discount
simple
F = P(1 + in)
single compounding
F = P(1+i)^n
compounding diff frequencies
F = P (1 + i/m) ^nm
Fv increases when we increase the frequency of the compounding of the interest payments. the more times per period the interest earned is reinvested, the larger the total interest earned
as m changes the payout at maturity increases
nominal/stated interest rate
The interest rate is the contractual annual percentage rate of
interest charged by a lender or promised by a borrower.
effective/true annual rate
the annual rate of interest actually paid or earned. ) includes the effects of compounding frequency, whereas the nominal
annual rate does not.
PV
The PV of a promised future amount is worth less the longer you have to wait to receive it
The process of calculating the PV is referred to as discounting
use -n if using formula w/ P as subject
else just use same formula and alpha equal
annuity
series of equal payments (cash outflows) or receipts (cash inflows) occurring over a
specified period of time
continuous payments made at regular interval
Examples : bond payments, student loan payments, car loan payments,
insurance premiums, mortgage repayments, retirement savings, leases, and rental payment
Investment savings: you pay the same amount every month or year into an investment account
Hire purchase agreements: you purchase a vehicle and pay back the financier in equal monthly
installments. If the interest does not change, you pay the same amount until the finance is repa
ordinary annuities
annuities in arrears
the payments or receipts occur at the end of each period
annuities due
(annuities in advance):
the payments or receipts occur at the start of each period
fv of ordinary annuity (fva) =
PMT x [(1+i)^(n) -1] / i
where PMT = regular payments at end of time period
investing, saving
annuity due FVA =
(1+i) x PMT x [(1+i)^(n) -1] / i
payment occurs at beginning of each period
annuity in advance- additional payment
how much will accumulate if you deposit x ammount in a savings account at the beginning of each year
PV of an ordinary annuity
PMT x [1-(1+i)^(-n) ] / i
exact amount to be invested today so when you withdraw, the principal and accumulated interest will be exhausted
how much must i invest now to receive future payments…
Pv of an annuity due
PMT x [1-(1+i)^(-n) ] / i x (1+i)
how much you should invest today at the beginning of the period to receive x amount after given years
ordinary deferred annuities
Equal annual payments will start at some future point in time
Investor wishes to invest now but payments begin at some future date
