Chapter 5 Finance Exam 2

time value of money

better to receive money sooner than later so you can invest and make a positive rate of return

compounding

find future value of cash flow at end of investments life

discounting

find present value at beginning of investment

single amount

lump sum currently held or expected in the future

annuity

equal periodic stream of cash flows over a time period

mixed stream

unequal periodic cash flows with no pattern

higher interest rate=

higher future value

longer investment time =

higher FV

simple interest

earned on an investments original principle, not on accumulated interest

higher discount rate =

lower present value

longer the waiting period =

lower PV

ordinary annuity

cash flow occurs at the end of period

annuity due

cash flow occurs at beginning of period

FV and PV will be greater than ordinary annuity

Perpetuity

annuity with infinite life, no FV is specified

in a mixed stream, there is no way to express

PV or FV

nominal annual rate

contract for rate of interest that is charged by lender and promised by borrower

effective annual rate

rate that is actually paid or earned

Applications of time value

1. determine deposits or payments needed to accumulate

2. loan amortization

3. find interest rate

4. find number of periods (N)