Perpetuity

What is an unsecured loan?

Lending provided to individuals that is not secured on an asset.

What are examples of unsecured loans?

Credit card lending, personal loans, student loans.

Why is an unsecured loan a risk for a lender?

Because it is not backed by collateral.

Why might a bank offer a higher 2-year interest rate compared to a 5-year rate?

Banks expect interest rates to decrease over time, so they leverage current economic conditions.

What does ROR stand for and what does it measure?

Rate of return; it measures the percentage of loss or gain generated by an investment.

What is the formula for Future Value (FV)?

FV = Co x (1 + r)^t

What is the formula for Present Value (PV)?

PV = Ct x 1/(1 + r)^t

What is the T-year annuity factor?

T year annuity factor = 1/r - 1/r(1+r)^t

What does the Present Value of an annuity represent?

PV of annuity = C1 x (1/r - 1/r(1+r)^t, where C1 is the cash flow to be received each year.

What is the formula for Future Value of an annuity?

FV of annuity = PV of annuity x (1+r)^t

What is the Annual Percentage Rate (APR)?

The interest rate annualized using simple interest.

How do you calculate APR?

APR = rate per period x periods per year.

What does EAR stand for and how is it calculated?

Effective Annual interest rate; calculated using compound interest.

What is the formula for EAR?

EAR = (1 + rate per period)^periods per year.

What is a perpetuity?

A financial security in which a cash flow is received forever, with identical cash flow.

What is the formula for Present Value of perpetuity?

PV of perpetuity = C1/r, where C1 is the cash flow received and r is the discount rate.

How do you calculate the return in the context of cash flow and present value?

Return = Cash flow / Present value.