a series of equally-spaced & level cash flows - over a

Annuity finite number of period

a series of equally-spaced & level of cash flows -

Perpetuity continue forever

cash flows - end of a period

Ordinary Annuity
mortgage payments, interest payments to
bondholders

cash flow - begin of a period

Annuity Due
leases, car insurance

amount needed to produce the annuity

current fair value or market price of annuity

amount of a loan - can be repaid with the annuity

Present Value (OD)

how borrowed funds are calculated over the life of a

loan
Ordinary Due Loan Amortization
less interest, more principle, paid off with the last
payment

Future Value

Present Value period less than in an ordinary annuity

Annuities Due value always higher than ordinary
Future Value period more than in an ordinary annuity
Chap 6: Discount Cash
Flows and Valuation
most important perpetuities - securities markets
today - stock issues

promises - pay investors a fixed dividend forever -

Perpetuities unless retirement date

PV = CF/i

Cash Flows That Grow at a Constant Rate

Growing Annuities
Growing Annuity

Growing
Perpetuity

require banks - disclose to consumers - annual

percentage rate - loan
APR

using simple interest

effective annual interest rate - take compounding

over the course of a year into acc

Effective Annual Interest Rate

APR

EAR

Lending Act - borrowers - be told actual cost

Consumer Protect Acts and Interest Rate Saving Act - actual return - be disclosed
Disclosure
Credit Card Act - limit credit card fee and interest
rate increase