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Chapter 5
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Gravity
Terms in this set (10)
Money's purchasing power changes by the mere passage of time due to...
- inflationary forces
- temporal consumption preferences
- uncertain nature of the future
Interest rates
- simple interest: interest earned only on the original investment
- compound interest: interest earned on original investment and on interest earned in the past
Future Value
amount to which an investment will grow after earning interest
- in finance, always assume annual compounding of interests
FVn = PV (1+i)^n
Continuous Compounding
compounding that takes place every instant
FV = PV x e^ni
Present Value
value today of future cash flows
PV = FVn/(1+i)n
Present Value and Continuous Compounding
For PV calculations with continuous compounding, we have to use the formulas. Recall that
FV = PV x eni
where i = the annual rate of interest,
n = the number of years considered,
e = 2.71828...
Then, by solving for PV, we get
PV = FV / eni .
perpetuity and annuity
Perpetuity: stream of equal cash payments that never end
Present Value of Perpetuity: PV = PMT/i
Annuity: evenly spaced stream of equal cash flows for a limited period of time
ordinary annuity
Evenly spaced stream of equal cash flows, that start at the end of Year 1 and last for a limited period of time.
annuity due
Evenly spaced stream of equal cash flows , that start at the Start of Year 1 and last for a limited period of time.
change calc from END mode to BGN mode
2nd, PMT, 2ND, Enter
PV Annuity Factor (PVAF)
The present value of $1 a year for each of t years
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