Exam_2_StudyGuide.docx - Annuity Types ORDINARY u2013...

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Annuity Types: ORDINARY – series of equally spaced & level cash flows over finite # of periods w/ pay @ period end (ex: wages) ~ ANNUITY DUE – payments are made at beg of period (ex: rent payment) ~ Ordinary annuity value x (1 + i) Present Value of Annuities : PV of the cash flow form an annuity disc. At the appr discount rate Future Value “ “: value of an annuity at some point in the future Amortization Schedule – first Pay mostly interest & loan towards end of loan (IR is small at end) i=IR ~ annual rate = IR pay, payment – IR = principal payment, end bal beg bal nxt yr Total Return - earned from holding an invst for a specified period ~ holding per return = current inc during per + capital gain ( ¿ loss ) during per beginninginvst value cptl gain/loss drg per=end invst val – beg invst Val ~ ex: P 0 = $ 100 ; P 1 = $ 97 ;nodividend TR= ( P 1 P 0 + D ) P 0 = ( 97 + 100 + 0 ) 100 = ¿ 1.97% Expected Return – average of possible returns from an investment where each return is weighted by the probability that it will occur Variance ( σ 2 ¿ – msr of uncertainty associated w/ an outcome ~ Standard dev ( σ ¿ distance of datapoints frm the mean SDV measr total/standalone risk ~ larger σ = lower probability that actl ret will be Closer to expct ret, assoc w/ wider prob distr of returns Geometric average return – accounts for time value of money ~avg Compounded return by an investor ~ r 2015 = 13% ,r 2016 = 8% ,r 2017 = 17% Return relative: 1+.13=1.13; 1+.08=1.08; 1+.17=1.17

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