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Aquilius D.

time line

an impo tool used in time value analysis, it's a graphical representation used to show the timing of cash flows

future value (FV)

the amt to which a cash flow or series of cash flows will grow over a given period of time when compounded at a given interest rate

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present value (PV)

the value today of a future cash flow or series of cash flows

compounding

the arithmetic process of determining the final value of a cash flow or series of cash flows when compound interest is applied

Formula Approach

FVn = PV(1+I)^n

present value

PV = FVn/(1+I)^n

opportunity cost

the rate of return you could earn on an alternative investment of similar risk

discounting

the process of finding the present value of a cash flow or series of cash flows; discounting is the reverse of compounding

Discounting tip

If you know the PV, you can compound to find the FV, while if you know the FV, you can discount to find the PV

annuity

a series of equal payments at fixed intervals for a specified number of periods

ordinary (deferred) annuity

an annuity whose payments occur at the end of each period

annuity due

an annuity whose payments occur at the beginning of each period

FVAn

the future value of annuity over N periods

FVAn =

PMT(1+I)^n-1 +

PMT(1+I)^n-2 +

PMT(1+I)^N-3

FVAn =

PMT[(1+I)^(n) - 1/I]

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compound interest

occurs when interest is earned on prior periods' interest

simple interest

occurs when interest is not earned on interest

consol

a perpetual bond issued by the British govt to consolidate past debts; in general, any perpetual bond

perpetuity

a stream of equal payments at fixed intervals expected to continue forever

annual compounding

the arithmetic process of determining final value of a cash flow or series of cash flows when interest is added once a year

semiannual compounding

the arithmetic process of determining the final value of a cash flow or series of cash flows when interest is added twice a year

nominal interest rate

the contracted interest rate

annual percentage rate

the periodic rate times the number of periods per year

effective annual rate

the annual rate of interest actually being earned, as opposed to the contracted rate (Nominal Interest Rate)

amortization schedule

a table showing precisely how a loan will be repaid. It gives the required payment on each payment date & a breakdown of the payment, showing how much is interest & how much is repayment of principle.

amortized loan

a loan with scheduled periodic payments of both principle and interest

uneven cash flow

more than 1 cash flow but not an annuity

cash flow

a revenue or expense stream that changes a cash account over a given period

payment

The transfer of one form of good, service or financial asset in exchange for another form of good, service or financial asset in proportions that have been previously agreed upon by all parties involved.

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