Chapter 6

Discounted Cash Flow Valuation

Ordinary Annuity
A common type of loan repayment plan calls for the borrower to repay the loan by making a series of equal payments over some length of time Cash flow occurs at the end of each period
First loan payment normally occurs one month after you get the loan

Aka: ordinary annuity form

Annuity Present Value

C x { 1-[1/(1+r)^t] /1}

Future Value for Annuities

[(1+r)^t 1] / r

Growing Annuity Present Value

C x { 1- [ (1+ g) / (1 + r) ^t] / r-g}

Annuity Due
Type of arrangement in which we have to prepay the same amount each period Calculator: beginning mode Ordinary annuity value x (1 + r)

Perpetuities
An annuity which the cash flows continue forever PV= C/r ex: Perferred Stock Growing Perpetuity Present Value: C x [ 1 / (rg)]

Stated Interest Rate

Interest rate expressed in terms of the interest payment made each period Aka: quoted interest rate

Effective Annual Rate (EAR)

The interest rate expressed as I it were compounded once per year = [ 1 + (Quoted rate/ m ] ^m] -1

Annual Percentage Rate (APR)

Interest rate charged per period multiplied by the number of periods per year

Continuous Compounding
q= quoted rate EAR= [e^q] -1

Pure Discount Loans

Simplest form of loan Borrower receives money today and repays a single lump sum at some time in the future

Interest-Only Loans
Borrower to pay interest each period and to repay the entire principle (the original loan amount) at some point in the future Aka: interest only loans

Amortized Loans
Lender may require the borrower to repay parts of the loan amount over time Ex: almost all consumer loans/ mortgages