Exam2_FC2 - Compounding Opportunity Cost For $1, its the...

Info iconThis preview shows pages 1–19. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Compounding Opportunity Cost For $1, its the interest we could have earned if we had received it sooner; so $1 today is worth more than $1 in the future. To measure opportunity cost, we can translate $1 today to its equivalent in the future. Annuity Discounting To measure opportunity cost, we can translate $1 in the future to its equivalent today. A sequence of equal cash flows. Annuity Equal Semi- Annual Coupon The interest payments over the life of the bond you receive when you buy a bond (annuity). i.e. if you borrow money to buy a house or a car, you will pay a stream of equal payments Perpetuity Perpetuity You will receive a fixed payment every period (month, year, etc) forever; cash flow stream that has no end. An annuity that goes on forever. End Mode; Begin Mode Payment / Interest Rate Present value of a perpetuity equation: Use ____ for an ordinary annuity and use ____ for an annuity due. Amortized Loans Annuity Due Cash flows occur at the beginning of each year rather than at the end of each year. Loans that are paid off with equal periodic payments. Effective Annual Rate (EAR) Effective Annual Rate (EAR) i.e. Annual Percentage Yield (APY) Shows that the interest rate quoted by the mortgage company is not really what youre paying. Whole Life Insurance Effective Annual Rate (EAR) Tells you that 6.5% with monthly compounding is equal to 6.697% with annual compounding. Insurance with very little risk, low returns, tax savings, and force you to save money. Compound Interest Term & Invest Insurance with higher risk, higher possible returns, investments are taxable, and must be disciplined to keep saving and investing money. The situation in which interest paid on an investment during the first period is added to the principal; during the second period, interest is earned on the original principal plus the interest earned...
View Full Document

This note was uploaded on 09/08/2011 for the course FIN 3403 taught by Professor Hill during the Fall '08 term at University of Central Florida.

Page1 / 72

Exam2_FC2 - Compounding Opportunity Cost For $1, its the...

This preview shows document pages 1 - 19. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online