FIN 3403 - Chapter 6 (ChatGPT)

Discounted Cash Flow Valuation

The process of determining the value of cash flows occurring at different points in time by accounting for the time value of money.

Cash Flow

Money received or paid during a specific period.

Multiple Cash Flows

Two or more cash payments or receipts occurring at different points in time.

Future Value (FV)

The value of money at a future date after earning interest or investment returns.

Present Value (PV)

The value today of money that will be received or paid in the future.

Compounding

The process of earning interest on both the original investment and previously earned interest.

Discounting

The process of calculating the present value of money to be received in the future.

Discount Rate

The rate of return used to calculate the present value of future cash flows.

Multiple Cash Flow Future Value

Calculate the future value of each cash flow separately and add the results, or compound the accumulated balance one period at a time.

Multiple Cash Flow Present Value

Calculate the present value of each cash flow separately and add the results, or discount the cash flows back one period at a time.

Equal Cash Flows

Cash flows that have the same dollar amount in each period.

Varying Cash Flows

Cash flows whose dollar amounts differ across periods.

Excel FV Function

The Excel function used to calculate the future value of an investment or series of payments.

Excel PV Function

The Excel function used to calculate the present value of an investment or series of payments.

Excel PMT Function

The Excel function used to calculate the regular payment for a loan or annuity.

Excel NPER Function

The Excel function used to calculate the number of payment periods.

Excel RATE Function

The Excel function used to calculate the interest rate per period.

NPER

The number of periods over which payments or compounding occur.

PMT

The equal payment made or received each period.

RATE

The interest rate per period used in a financial calculation.

Annuity

A series of equal cash flows occurring at regular intervals for a fixed number of periods.

Ordinary Annuity

An annuity in which equal payments occur at the end of each period.

Present Value of an Annuity

The value today of a series of equal future payments, discounted at the required rate of return.

Annuity Payment Calculation

The process of finding the regular payment amount using the present value, interest rate, and number of periods.

Perpetuity

An annuity with cash flows that continue forever.

Perpetuity Formula

PV = PMT / r, where PMT is the payment each period and r is the required rate of return per period.

Growing Annuity

A series of cash flows that grow at a constant rate for a fixed number of periods.

Growing Annuity Formula

PV = C1 / (r - g) × [1 - ((1 + g) / (1 + r))^n], where C1 is the first payment, r is the discount rate, g is the growth rate, and n is the number of periods.

Growing Perpetuity

A series of cash flows that grow at a constant rate and continue forever.

Growing Perpetuity Formula

PV = C1 / (r - g), where C1 is the next period's payment, r is the required return, and g is the constant growth rate. The required return must exceed the growth rate.

Growth Rate (g)

The rate at which cash flow payments increase over time.

Required Rate of Return

The minimum return an investor requires to invest in an asset.

Stated Interest Rate

The quoted annual interest rate before accounting for the effects of compounding within the year.

Effective Annual Rate (EAR)

The actual annual rate of return after accounting for compounding.

EAR Formula

EAR = (1 + stated annual rate / m)^m - 1, where m is the number of compounding periods per year.

Compounding Frequency

The number of times interest is compounded per year, such as monthly, quarterly, semiannually, or daily.

Semiannual Compounding

Interest is compounded twice per year.

Quarterly Compounding

Interest is compounded four times per year.

Monthly Compounding

Interest is compounded twelve times per year.

Daily Compounding

Interest is compounded daily, typically using 365 periods per year in the chapter's examples.

Annual Percentage Rate (APR)

The quoted annual interest rate that does not account for the effect of compounding within the year.

APR vs. EAR

APR is the stated annual rate; EAR reflects the actual annual rate after compounding. EAR is generally higher when compounding occurs more than once per year and the rate is positive.

Pure Discount Loan

A loan in which the borrower receives money today and repays one lump sum at a future date, with no intermediate payments.

Treasury Bill (T-Bill)

A short-term financial instrument with no intermediate payments that can be valued like a pure discount loan.

Interest-Only Loan

A loan in which the borrower pays interest each period and repays the entire principal at a future date.

Principal

The original amount borrowed or invested, excluding interest.

Coupon

The interest payment made on a bond.

Face Value

The principal amount of a bond repaid to the bondholder at maturity.

Amortized Loan

A loan in which each payment covers interest and repays part of the principal.

Principal and Interest (P&I) Loan

Another name for an amortized loan, where payments include both principal repayment and interest.

Mortgage

A loan commonly used to purchase property that is repaid through scheduled payments, typically with principal and interest.

Car Loan

A loan used to finance a vehicle, commonly repaid through scheduled principal and interest payments.

Loan Repayment Structure

The arrangement describing when and how a loan's interest and principal are repaid.