Annuities
A series of equal payments or receipts:
occurring over a specified number of periods. In an ordinary annuity, payments or
receipts occur at the end of each period;
-in an annuity due,
-payments or receipts occur at the beginning of each period.
The breakdown between interest and principal
-is important because on a business loan only interest is deductible as an expense for
tax purposes.
Most financial decision, person as well as business, involve the time value of money.
We use the rate of inte
Present (or Discounted) Value
Fvo:
is the future cash flow to be received at the end of year n,
-m is the number of times a year interest is compounded, and i is the discount rate.
the greater the future value.
PVo =
FVn /(1 + [i/m])^mn
The fewer times a
Nonzero Coupon Bonds
If a bond has a finite maturity,
-then we must consider not only the interest stream but also:
the terminal or maturity value (face value) in valuing the bond.
The valuation equation for such a bond that pays interest at the end of e
Mixed (Uneven) Flows
Draw a time line:
position cash flows, and draw arrows to indicate direction and position of adjustments.
Perform a calculation as indicated by your diagram.
Rule of 72
A quick way to handle compound interest problems involving doub
Liquidation Value
The amount of money that could be realized if an asset or a group of assets (ex. A
firm) is sold separately from its operating organization.
Going-Concern Value
The amount a firm could be sold for as a continuing operating business.
Th
Future value of an ordinary annuity
cash flows occurs at the end of each period, and:
future value is calculated as of the last cash flow.
Future value of an annuity due
cash flows occurs at the beginning of each period, and:
future value is calculated
Future Value of an Annuity Due
A three-year annuity due is:
simply equal to the future value of a comparable three-year ordinary annuity
compounded for one more period.
Thus the future value of an annuity due:
at i percent for n periods (FVADn) is determ
In short, its economic value.
If markets are reasonably efficient and informed,
-the current market price of a security should fluctuate closely around its intrinsic value.
Bond
A long-term debt instrument issued by a corporation or government.
A securit
Professional bond traders often turn to bond value tables,
Given any three of the four factors (maturity, coupon rate, required return, present
value),
-one can look up the fourth.
Though it may seem inappropriate to use semiannual discounting on the matu