Time value of money copy
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This document discusses key concepts related to time value of money analysis including cash flows, interest rates, compounding, present value, future value, discounting, and other valuation techniques. It defines important terms like compounding, present value, future value, annuities, perpetuities, effective interest rates, and loan amortization. Timelines, formulas, and graphs are presented to illustrate the relationships between these concepts and how they are used to assess the value of cash flows over time under different interest rate scenarios.
Time value of money copy
- 2. Time line important tool used in time value of money analysis; it is a graphical representation used to show the timing of cash flows
- 4. Outflow cash deposit ,cost , or amount paid has a minus sign Inflow cash receipt
- 7. Compounding arithmetic process of determining the final value of a cash flow or series of cash flow when compound interest is applied
- 10. Future value (FV) amount to which a cash flow or a series of cash flows will grow over a given period of time when compounded at a given interest rate
- 12. N I PV PMT FV = the number of periods = interest rate of periods = present value = payment = future value
- 13. Relationship among Future Value, Growth, Interest Rates, and Time 5 4 Future Value of $1 3 i = 0% I =5% 2 i = 10% i = 15% 1 0 0 2 4 6 8 10 Periods
- 14. Opportunity Cost Rate rate of return on the best available alternative investment of equal risks
- 15. Present Value (PV) value of today of a future cash flow or series of cash flow
- 16. Fair(Equilibrium) Value price at which investors are indifferent between buying or selling a security
- 17. Discounting process of finding the present value of a cash flow or a series of cash flows; discounting is the reverse of compounding
- 20. Relationship among Present Value, Interest Rates, and Time 1 0.75 i = 0% 0.5 i = 5% i = 10% i = 15% 0.25 0 0 2 4 6 8 10
- 23. Annuity series of payment of an equal amount at fixed intervals for a specified number of periods
- 24. Ordinary (Deferred) Annuity annuity whose payment occur at the end of each period
- 25. Annuity Due annuity whose payment occur at the beginning of each period
- 26. future value of an annuity over n periods
- 28. Perpetuity stream of equal payments expected to continue forever
- 29. CONSOL perpetual bond issued by the British government to consolidated past debts; in general, any perpetual bond
- 30. Uneven Cash Flow Stream series of cash flow in which the amount varies from one period to the next
- 31. Payment (PMT) term designates equal cash flows coming at regular intervals
- 32. Cash Flows (CF) term designates uneven cash flows
- 33. Terminal Value future value of an uneven cash flows stream
- 34. Annual compounding arithmetic process of determining the final value of a cash flow or series of cash flows when interest is added once a year
- 35. Semiannual Compounding arithmetic process of determining the final value of a cash flow or series of cash flows when interest is added twice a year
- 36. Nominal (Quoted, or Stated, or APR) InterestorRate or contracted, quoted, stated, interest rate
- 37. Effective (Equivalent)Annual Rate (EFF% or EAR) annual rate of interest actually being earned, as opposed to the quoted rate equivalent annual rate
- 38. Annual Percentage Rate (APR) periodic rate X the number of periods per year
- 39. Amortized Loan loan that is repaid in equal payments over its life
- 40. Amortization schedule table showing precisely how a loan will be repaid gives the required payment on each payment date and a breakdown of the payment, showing how much is interest and how much is repayment of principal