Prelim 1 notes - CHAPTER 5-Compounding Process of...

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Sheet1 Page 1 CHAPTER 5 -Compounding: Process of accumulating interest on interest (investing interest) -compound interest: interest of both principal and interest -simple interest: only original principal (1+r)^t = FVIF more and more interest builds up = more to compound -Interest for PV = Discount rate -discount it back to present = get PV -discounted cash flow valuation (DCF) = calculating the PV CHAPTER 6 -t for furture (1+r)^(t - tx) -Implicitly, assume that cash flow happens at end of each period. -annuity: cash flows fixed PMT for fixed time -Formula: C x [(1-PVIF)/r] - Annuity FV factor = [FVIF - 1/r] -annuity due: cash flows happen at beginning of period >2nd -> BGN - perpetuity: annuity in which cash flows continue forever PV for perpetuity = C/r *consol: a type of perpetuity Growing annuity present value = C x {[1-(1+r/1+g)^t]/(r-g)]} Growing perpetuity present value = C x [1/r-g] = C/(r-g) ****g = growth rate -rate is quoted as 10% semiannually = actually pays 5% every six months
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Sheet1 Page 2 -stated interest rate: quoted interest rate
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  • Fall '07
  • MA

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