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Unformatted text preview: 28-1a. PV (present value) is the value today of a future payment, or stream of payments, discounted at the appropriate rate of interest. PV is also the beginning amount that will grow to some future value. The parameter I is the periodic interest rate that an account pays. FVn (future value) is the ending amount in an account, where n is the number of periods the money is left in the account. PMT is equal to the dollar amount of an equal or constant cash flow (an annuity). In the EAR equation, m is used to denote the number of compounding periods per year, while iNomis the nominal, or quoted, interest rate.b. FVIFi,nis the future value interest factor for a lump sum left in an account for n periods paying i percent interest per period. PVIFi,n is the present value interest factor for a lump sum received n periods in the future discounted at i percent per period. FVIFAi,nis the future value interest factor for an ordinary annuity of n periodic payments paying i percent interest per period. PVIFAi,nis the present value interest factor for an ordinary annuity of n periodic payments discounted at i percent interest per period. All the above factors represent the appropriate PV or FVnwhen the lump sum or ordinary annuity payment is $1. Note that the above factors can also be defined using formulas.c. The equivalent (effective) annual rate (EAR) is the rate that, under annual compounding, would have produced the same future value at the end of 1 year as was produced by more frequent compounding, say quarterly. The nominal (quoted) interest rate, iNom, is the rate of interest stated in a contract. If the compounding occurs annually, the effective annual rate and the nominal rate are the same. If compounding occurs more frequently, the effective annual rate is greater than the nominal rate.d. An amortization schedule is a table that breaks down the periodic fixed payment of an installment loan into its principal and interest components. The principal component of each payment reduces the remaining principal balance. The interest component is the interest payment on the beginning-of-period principal balance. An amortized loan is one that is repaid in equal periodic amounts (or “killed off” over time).e. The par value is the nominal or face value of a stock or bond. The par value of a bond generally represents the amount of money that Answers and Solutions:28 - 1Web Chapter 28Basic Financial Tools: A ReviewANSWERS TO END-OF-CHAPTER QUESTIONSthe firm borrows and promises to repay at some future date. The par value of a bond is often $1,000, but can be $5,000 or more. The maturity date is the date when the bond’s par value is repaid to the bondholder. Maturity dates generally range from 10 to 40 years from the time of issue. A call provision may be written into a bond contract, giving the issuer the right to redeem the bonds under specific conditions prior to the normal maturity date. A bond’s coupon, or coupon payment, is the dollar amount of interest paid to...
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This note was uploaded on 08/29/2009 for the course FM Finance taught by Professor Unknown during the Spring '09 term at DeVry Addison.
- Spring '09