FIN 300 Section 2-4.pdf - Finance 300 Section II...

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Finance 300Section IIDefinitionsTime Value of Money: Return (investing current income vs. capital gains income), Time (how long you have to wait), and Risk (chance you will not receive return) Time Zero: Refers to the beginning of a transaction in time value of money problems. Usually the current point in time (today) Future Value (FV): What an investment will be worth after earning interest for one or more time periods Compounding: The process of converting the initial amount into a future value Compound Interest: Both simple interest and interest on interest Principal: The amount of money (beginning balance) on which interest is paid Simple Interest: The amount of interest paid on the original principal amount. The interest earned each period is paid only on the original principal amount Interest on Interest: The interest earned on the reinvestment of previous interest payments Discounting: The process of calculating the present value Discount Rate (Interest Rate): The interest rate used in the discount process to find the present value of future cash flows Present Value (PV): Can be thought of as the current value of a future cash flow discounted at the appropriate rate Finding the Interest Rate: When you want to determine the return on an investment Zero Coupon Bond: A loan that pays no periodic interest. The issuer (firm that borrows the money) makes 1 payment when the bond matures (is due) that includes repayment of the amount borrowed plus all interest. Bonds: Long-term debt securities issued by corporations and government agencies Secured Bond: The bond has some sort of collateral, meaning there is an asset that is tied to the bond (a car is the collateral for the loan) Unsecured Bond: Aka Debentureor subordinated debenture Subordinated Debenture: A debenture that was purchased most recently, meaning older debentures will be paid back first. Riskier, so there is a higher return Junk Bond: Greatly subordinated bond, meaning it has more risk since there are a ton of other bonds out there. The return (if it is returned) will be greater than a standard, early-purchased bond Bearer Bond: No record of ownership. Like cash. If you lose it, there is nothing you can do about it Indenture: The conditions of a bond Rights of all parties, restrictive provisions (company cannot sell of collateral), sinking fund, call feature (company can force you to sell the bond back to them), convertible feature (you can convert the bond to common shares of stock), terms (coupon rate, par value, maturity)
Video 1 Rule of 72: How long it takes to double your money (accurate between 5-20 percent) (if 6%, it is )ofyearstodouble#=72InterestRate672nnualinterestrateearnedA=72# ofyearsFuture Value of a Lump Sum (D-1) Example 1 Future Value of an Annuity Annuity: Series of equal payments made at equal time intervals Annuity Due: Payment made at the beginning of the period (rent, leases) Ordinary (Regular) Annuity: Payment made at end of period (loans)

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