FIN/571 Week 2 Discussion Questions.docx

# References unknown nd what is the annual percentage

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References: Unknown, n.d., What is the Annual Percentage Rate? Corporate Finance Institute (CFI.) Retrieved from: Unknown, n.d., What is the Effective Annual Rate? Corporate Finance Institute (CFI.) Retrieved from: Describe the various types of annuities and how they are calculated. The various types of annuities are: 1. Delayed Annuity - A delayed annuity is also known as a deferred annuity. The investor puts in a lump sum or pays period payments into the annuity and the funds grow over a specified period of time called an accumulation period. Once this accumulation period is up, the annuity begins periodic payouts to the investor. PV = C / (r – g) * (1 – ((1 + g) / (1 + r))T ) 2. Annuity Due - An annuity due is also known as an immediate annuity. The investor puts in a lump sum and immediately starts receiving periodic income payments for either a specified time or possibly for life depending on how the annuity was set up. PV = C / r * (1 – 1 / (1+r)T ) [T is the number of payments received (starting next period)] 3. Infrequent Annuity - An infrequent annuity calculates actual interest rate over the actual period and does not get paid every year or every period. r = (1+r0) n – 1, T = T0/n, where n is the number of periods between payments. 4. Growing Annuity A growing annuity provides a growing stream of cash flows and includes a fixed maturity. PV = C / (r – g) * (1 – ((1 + g) / (1 + r))T ) References: Ross, S., Westerfield, R., Jaffe, J., & Jordan, B. (2016). Corporate Finance (11th). New York, NY: McGraw-Hill.

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unknown, n.d. Finance 100 Summary. Swarthmore College. Retrieved from Einstein once remarked that ..."Compound interest is the eighth wonder of the world". Why would he make such a statement? Although he was probably exaggerating to make a point, do you agree with him? Simple interest is based on the principal amount of a loan or deposit, while compound interest is based on the principal amount and the interest that accumulates on it in every period. (Nickolas, 2017.) With simple interest, balance growth is constant. While with compound interest, your balance is growing at an increasing rate. Compound interest is interest that compounds annually, meaning the interest you earn each year is added to your principal. It continues to add interest the following year. When I consider compound interest, I think about how rapidly a credit card balance accumulates. While Albert Einstein most likely did not have consumer credit card debt and I disagree with this statement, I can visualize why would make the statement that “Compound Interest is the eighth wonder of the world.” He must have the first-hand experience with growing investments or savings and was impressed with the results or the possibilities of its growth.
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