ECON371 Study Guide - Midterm Guide: Real Interest Rate, Nominal Interest Rate, Interest Rate Risk
13 Mar 2017
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Chapter 5: the time value of money cont. Annuity: cash flows of equal amounts every period for a limited # of periods. Annuity due: when the stream of payments starts immediately: another way to value: the pva due is (1+r) x pv of an equivalent ordinary annuity, example: (cid:1842) (cid:1830)(cid:1873)(cid:1857)=(cid:883)+[(cid:883)(cid:1870) (cid:883) (cid:1870)(cid:4666)(cid:883)+(cid:1870)(cid:4667)(cid:3047) (cid:2869), ordinary pva= 9947. 41. Future value of an annuity (fva: can be found 2 ways: Unfortunately, many streams of cash flows are not equal. If the cash flow stream grows at a constant rate, g, valuation formulas are available. Fva due: when the stream of payments starts immediately: calculate the fv of each cash flow, fva. = pva x (1+r)t: when payments start 1 period from now. C= the payment to occur at the end of the 1st period g= the growth rate of the payments. Inflation: the rate at which prices as a whole are increasing.
