fin management chapter 5
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Simple interest
interest is earned only on principal

compound interest
an investment during the first period is added to the principal; then, during the second period interest is earned on the new sum (includes principals and interest earned so far)

future value
amount of sum will grow to in a certain number of years when compounded at a specific rate
 FVN: future of the investment at end of "n" years
 PV: PV, or original amount invested at the beginning of the first year

how to increase the future value
 increasing number of years compounding
 increasing interest rate or discount rate
 increasing original investment

increase future value by
increasing number of years for which money is invested and/or investing at higher interest rate

present value
reflects the current value of a future payment or receipt

PV is lower if
time period is longer and/or interest rate is higher

Annuities
FV of annuity, PV of annuity, annuities due

annuity
an annuity is a series of equal dollar payments for a specified number of years

ordinary annuity
payments occur at end of each period

FV of an annuity is a compound annuity which is
depositing or investing an equal sum of money at the end of each year for a certain number of years and allowing it to grow

PV of an annuity
pensions, insurance, obligations and interest owed on bonds are all annuities. to compare these three types of investments we need to know the present value of each

Annuities due
ordinary annuities in which all payments have been shift forward by one time period. thus with annuity due, each annuity payment occurs at the beginning of the period rather than at the end of the period

Amortized Loan
loans paid off in equal installments over time (home mortgages, auto loans)

amortizing
reducing the balance of a loan via annuity payments

periodic payment is fixed in a
amortized loans

in an amortized loan each payment you owe
less towards principal; amount that goes toward interest declines with every payment

to make rates comparable we compute
annual percentage yield (APY) or effective annual rate (EAR)

quoted rate could be very different from effective rate if
compounding is not done annually

perpetuity
annuity that continues forever