fin management chapter 5

interest is earned only on principal

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)

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

• increasing number of years compounding
• increasing interest rate or discount rate
• increasing original investment

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

reflects the current value of a future payment or receipt

time period is longer and/or interest rate is higher

FV of annuity, PV of annuity, annuities due

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

payments occur at end of each period

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

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

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

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

reducing the balance of a loan via annuity payments

amortized loans

less towards principal; amount that goes toward interest declines with every payment

annual percentage yield (APY) or effective annual rate (EAR)

compounding is not done annually

annuity that continues forever