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BUSI 402 Ch 6

# BUSI 402 Ch 6 - Chapter 6 Evaluating the Financial Impact...

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Chapter 6: Evaluating the Financial Impact of Loans and Investments I. Level 1: Calculating Values for Simple Financial Transactions a. Principal – the value of the loan or investment b. Simple interest – interest that is paid solely on the amount of the original principal value c. Compound interest – adding interest earned each period to the principal fir purposes of computing interest for the next period d. Annual percentage yield (APY) – the equivalent of a yearly simple interest rate, taking into account compounding e. Annual percentage rate (APR) – this rate reflects the interest being paid on the actual amount borrowed e.i. Can be problematic b/c banks calc in different ways f. PMT function – finds the value of the payment per period, assuming that there are constant payments and a constant interest rate for the duration of the loan f.i. PMT(rate, nper, pv, fv, type) f.i.1. Rate – the interest rate per compounding period f.i.2. Nper – number of compounding periods f.i.3. PV – present value, the original principal value at the beginning of the financial transaction f.i.4. FV – future value, the value at the end of the financial transaction f.i.5. Type – designates when payments are made. f.i.5.a. Type 0 – indicates that payments are made at the end of the period f.i.5.b. Type 1 – indicates that payments are made at the beginning of the period g. Cash flow – the inputs and outputs (cash received and cash paid during the course of the financial transaction) h. Positive cash flow – when cash is received i. Negative cash flow – when cash is paid out j. At the beginning of loan payment, when interest expenses are high, most of the payment is used to pay off the interest on the loan. As the principal amount is slowly lowered, more and more of the payment amount is applied to the principal debt k. Basic financial formulas: k.i.

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