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Fin 3080 Prof Xin Li Week 5 Notes

by: Brady Zuver

Fin 3080 Prof Xin Li Week 5 Notes FIN 3080C

Marketplace > University of Cincinnati > Finance > FIN 3080C > Fin 3080 Prof Xin Li Week 5 Notes
Brady Zuver
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About this Document

This section of notes covers the basic principles of annuities and perpetuates and their formulas.
Business Finance
Xin Li
Class Notes
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This 1 page Class Notes was uploaded by Brady Zuver on Thursday September 22, 2016. The Class Notes belongs to FIN 3080C at University of Cincinnati taught by Xin Li in Fall 2016. Since its upload, it has received 4 views. For similar materials see Business Finance in Finance at University of Cincinnati.


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Date Created: 09/22/16
FIN 3080 Prof Xin Li Week 5 Notes Chapter 6 1. Valuing level CFs: Annuities and Perpetuities a. Annuity: Any level stream of CFs for a fixed period of time i. A series of constant or level CFs that occur at the end of each period for a number of fixed periods ii. Annuity Present Value = 1 1− t 1−Present ValueFactor [1+r ) C∗ ( r )∨C∗( r ) 1. C is the constant (annuity value or single cash flow) iii. Higher interest rate, lower annuity present value factors iv. Annuity Future Value = (Future Value Factor -1)/r 1. FV Factor= (1+r)t b. Annuity due: An annuity for which the CF occur at the beginning of the period i. Ex. Leasing an apartment, first payment due immediately ii. Calculate normal annuity value, then multiply by 1+rate 1. Annuity Due Value = Ordinary annuity value * (1+r) c. Perpetuity: Annuity in which CFs continue forever i. PV for a perpetuity= C/r 2. Growing Annuities and perpetuities a. Annuities that commonly have payments grow over time 1+g t 1−[1+r b. Growing Annuity PV = C∗( ) r−g C c. Growing Perpetuity PV= r−g 3. Compounding Rates: The Effects of Compounding a. Effective annual Rates (EAR) i. The rate you will earn m ii. EAR = [1+(Quoted Rate/m)] -1 1. M= number of times interest is compounded over the year iii. Annual Percentage Rate (APR) 1. Interest Rates per period times number of periods per year a. Need to calculate EAR to see what is actually being paid


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