Math of investment

• maker- is the one liable
• payee - is the one entitled to payment on the date of maturity
• When a note is negotiable, the payee may obtain cash before maturity date by discounting the note at a bank or other financing company
• To discount the note, the payee must endorse it. Thus, legally the payee becomes an endorser and the bank becomes an endorsee.  
• Endorsement - is the transfer of right to a negotiable instrument by simply signing at the back of the instrument.
• Endorsement may be with recourse which means that the endorser shall pay the endorsee if the maker dishonors the note. In the legal parlance, this is the secondary liability of the endorser. In the accounting parlance, this is the contingent liability of the endorser.
• Endorsement may be without recourse which means that the endorser avoids future liability even if the maker refuses to pay the endorsee on the date of maturity. In the absence of any evidence to the contrary, endorsement is assumed to be with recourse.
• Net Proceeds - refer to the discounted value of the note received by the endorser from the endorsee.
• Maturity Value - is the amount due on the note at the date of maturity. Principal plus interest equals the maturity value.
• Maturity date - is the date on which note should be paid.
• Principal - is the amount appearing on the face of the note. It is also referred to as the face value.
• Interest - is the amount of interest for the full term of the note. Interest is computed as Principal × rate × time.
• Interest rate - is the rate appearing on the face of the note.
• Time - is the period within which interest shall accrue. For discounting purposes, it is the period from date of note to maturity date. In other words, the term "time" is the entire period or "full term" of the note.
• Discount - is the amount of interest deducted by the bank in advance. Discount is equal to maturity value times discount rate times discount period.
• Discount rate - is the rate used by the bank in computing the discount. The discount rate should not be confused with the interest rate.  
• Discount period - is the time from date of discounting to maturity date. Simply computed, discount period equals term of the note minus the expired portion up to the date of discounting. The discount period is the unexpired term of the note.
• An annuity - is a sequence of equal payments made at regular intervals of time. Examples of annuities are premiums on life insurance, payments of properties bought on installment bases, interest payments on bonds, house rentals, pensions and so on.  
• The length of time between two successive payments is called the payment interval or rent period. It may be one year, six months, three months or any other period of time 
• The time between the beginning of the first payment interval and the end of the last payment interval is the term of the annuity
• The size of each payment is known as the periodic paymen
• The present value of an ordinary annuity - is the sum of all discounted value of several payments due at the beginning of the term, with the first payment to be made at the end of a period.
• An annuity due or sometimes called annuity in advance is one for which the first payment occurs immediately. It is also defined as an annuity in which payments are made at the beginning of each period.  
• The present value of an annuity due is the sum of all discounted value of several payments due at the beginning of the term, with the first payment to be made at the beginning of a period.
• Classification of annuity according to time of payment

  • Ordinary annuity(annuity immediate)
  • Annuity due
• Ordinary annuity- annuity immediate - a type of annuity in which the payments are made at the end of each payment interval
• Annuity due- a type of annuity in which the payments are made at the beginning of each payment interval
• Classification of annuity according to payment interval and interest period

  • Simple annuity
  • General annuity
• Simple annuity - an annuity where the payment interval is the same as the interest period
• General annuity - an annuity where the payment interval is not the same as the interest period
• Classification of annuity according to duration

  • Annuity certain
  • Contingent annuity
• Annuity certain- an annuity which payments begin and end at definite times
• Contingent annuity - an annuity in which the payments extend over an indefinite or (indeterminate) length of time