BizFinance_Exam2_studyGuide - Chapter 4 Interest = interest...

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Chapter 4 Interest = interest rate + initial investment FV = P x (1+r)^t Compound Interest interest earned on interest Simple Interest interest earned only on the original investment; no interest is earned on interest Compound Growth means that the value increases each period by the factor (1 + growth rate) the value after t periods will equal the initial value times (1+growth rate). When $ is invested at compound interest, the growth rate is the interest rate PV = FV/(1+r)^t Discounted Cash Flow another term for the PV of a future cash flow Discount Rate irate used to compute PV’s of future cash flows Discount Factor PV of a $1 future payment Finding Interest Rates when solving for irate, move everything to other side and multiply the exponent x to 1/x on the other side Cash Flows To find the value at some future date of a stream of cash flows , calc what each cash flow will be worth at that future date, and then add up these future values. The PV of a stream of cash future cash flows is that u need to invest today to generate that stream ANNUITY equally spaced level stream of cash flows w/a finite maturity Value of an annuity is = to the diff btwn the value of 2 perpetuties **annuity is equivalent to the diff btwn an immediate and a delayed perpetuity PV of t-yr annuity = C{1/r – 1/r(1+r)^t} OR (payment x annuity factor) Annuity factor PV of a $1 annuity PERPETUITY stream of level cash payments that never ends
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PV of Perpetuity = cash payment / irate Both Perpetuity and Annuity formulas assume that the 1 st payment happens at end of period. Annuities Due Level stream of cash flows due immediately PV of Annuity Due = (1+r) x PV of an Annuity FV of Annuity of $1 a yr = PV of annuity of $1 a yr X (1+r)^t (1+r)^t – 1 / r FV of an Annuity due = FV of ordinary annuity x (1+r) INFLATION rate at which prices as a whole are increasing CPI how economists track the general level of prices. It measures the # of $ that it takes to buy a specified basket of goods/services that is supposed to represent the typical familys purchases % inc of CPI yr-to-yr measures the rate of inflation
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BizFinance_Exam2_studyGuide - Chapter 4 Interest = interest...

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