(3) Ch 05 - Uneven Cash Flows & Amortization Schedule

Even if you're tired, do it. You're lazy, I know. But you really going to let a misogynistic man smirk at you?? HELL NO, STAND UP FOR YOURSELF WITH KNOWLEDGE!

Uneven (nonconstant) Cash Flows =

Payments that vary from one period to another

Net Present Value ( NPV ) =

The sum of the PVs of all cash flows in an investment

What does the Cash Flow (CFₜ) term represent?

CF = Cash Flow

t = Time Period (years)

Amortized Loan =

A loan repaid in equal payments over time.

True / False:

With each amortized loan, each payment covers both interest and principal

True.

In an amortization schedule, PMT column = Interest - Principal.

Amortization Schedule =

A table.

Shows how a loan is repaid over time.

In an amortization schedule, there are 6 columns and they are:

(in order)

1. Year

2. Beginning Balance ( aka the PV )

3. Payments

4. Interest

5. Principal

6. Ending Balance

Nominal Rate (APR) =

The stated yearly interest rate that does not account for compounding.

(ie, what the bank advertises the IR is)

Effective Annual Rate (EAR) =

The actual yearly IR after compounding is considered

Effective Annual Rate ( EAR ) Formula

Net Present Value ( NPV ) Formula =

If a project has a cash flow of $200, $300, $400 respectively in years 1-3, what kind of cash flows is this?

Uneven (nonconstant) Cash Flow.

This is bcs the payments for each year varies.

Tricky Question:

When would Effective Annual Rate ( EAR ) be more useful than Nominal Rate ( APR )?

EAR is useful for comparing investments and loans with different compounding periods :)

True / False:

Nominal Rate ( APR ) includes the effect of compounding.

False.

APR does not account for compounding.

Tricky Question #2:
If two loans have the same Nominal Rate ( APR ),
but one compounds monthly and the other compounds semi-annually, are they equal in cost?

They are not equal in cost.

This is because the one with more compounds will generate more money than the lesser.

True / False:

The loan with more frequent compounding will have a higher Effective Annual Rate ( EAR ) than the one that compounds less?

True.
More compounds = More money

A S Q M

(note: asim = sour)

Annually

Semi-Annually

Quarterly

Monthly

How many times do you compound: A S Q M?

A = 1x a year

S = 2x a year

Q = 4x a year

M = 12x a year

Beginning Balance - Principal =

Ending Balance

Beginning Balance x IR % =

Interest Column

Interest Rate % in TVM does not equal the:

Interest Column in the Amortization Schedule

Year 1 Ending Balance is equal to

Year 2 Beginning Balance

In an amortization schedule, you calculate Payment by:

Interest - Principal

In an amortization schedule, you calculate Principal by:

Payment - Interest