c4: time value of money

• Time value of money is also called discounted cash flow (DCF) analysis. It's a technique that deals with cash flows at different points in time
• CFt = Cash flow at time t; a positive number indicates a cash inflow, while a negative number indicates a cash outflow
• PV = Present value, cash flow at Time 0 (today, now, present, beginning) ie. PV = CF0
• FVN = Future value, value of PV = CF0, N periods into the future
• I = Interest rate (%) earned per period
• •INT = Dollars of interest earned during the period (ie. INT = PV * i)
• Interest earned only on the principal is called simple interest which = PV(I)(N)
• Interest earned on the interest earned in prior periods is called compound interest: PV(1 + I)N – PV
• calculating the present value and the future value of a single payment is called a "lump sum”
• a series of payments that are equal and made at fixed intervals, are called an annuity. There are 2 types ordinary (or deferred) annuity and annuity due.
• since each payment for an annuity due occurs 1 period earlier, the payments will all be discounted for 1 less period
• A perpetuity is simply an annuity extending out forever, which makes the step-by-step approach not possible
• Nominal/Quoted Interest Rates (aka APR) are stated in contracts and quoted by banks and brokers
• the periodic rate is A rate charged by a lender or paid by a borrower each period
• the effective annual rate (ear) is the annual rate that produces the same result as if we had compounded at a given periodic rate M times per year
• The effective percentage (EFF%) is the interest rate expressed as if it were compounded once per year
• Annual Percentage Rates (APR) are The nominal annual interest rate actually charged on loans. this is important for loans using add-on interest