Question

In: Finance

Please explain the following terms: Number of periods Multiple cash flows Compounding periods EAR Perpetuity Growing...

Please explain the following terms:

Number of periods

Multiple cash flows

Compounding periods

EAR

Perpetuity

Growing perpetuity

Annuity

Expert Solution

number of periods : Is the amount of time it is required for a single cash flow, to reach a certain amount of money in the future.

FV = pV ( 1+ R)^N

Where, n = number of periods.

Multiple cash flows :if the multiple cash flows are fixed an earn a particular rate of interest every year it is called an annuity.

The Fv of multiple cash flows is the sum of the individual Fv of cash flows.

The compounding periods is the lenght of time from one interest payment to the next. It is either compounded annually, semi- annually or quarterly.

EAR : Is the interest rate that an investor can earn in a year after it is compounded over a given period of time. It is helpful as it provides us with the calculation of the true interest on a loan .

formula for EAR IS :

EAR = [( 1 + i/n)^n ]- 1

Perpetuity: is a constant stream of cash flows that are identical and have no end.

Present value of perpetuity = D/r

d= dividend or coupon per year

r = discount rate

Growing perpetuity : is a series of periodic cash flows that is growing at a periodic rate and are received for an infinite amount of time.

PV of growing perpetuity is = D1/ Re - g

Annuity is a series of cash flows at is paid at regular intervals.

Examples are ; monthly deposits at savings account, monthly home mortgage payments.

jeff jeffy answered 1 year ago

Which of the following is NOT correct? Multiple Choice A) Cash flows occurring in different periods...

Which of the following is NOT correct? Multiple Choice A) Cash flows occurring in different periods should not be compared unless the flows have been discounted to a common date. B) The argument that 700 dollars today worth more than 700 dollars one year from now is correct only when interest rate is positive. C) Other things being equal, the more frequent the compounding period, the higher the EAR. D) Other things being equal, the more frequent the compounding period,...

A growing perpetuity of cash flows has a first cash flow of $500 and each subsequent...

A growing perpetuity of cash flows has a first cash flow of $500 and each subsequent cash flow grows by 2%. The appropriate discount rate is 10%. If the first cash flow occurs in 2 years, what is the value of the growing perpetuity in 5 years? $6,632.55 $6,250.00 $5,165.29 $8,318.75

12. Non annual compounding period The number of compounding periods in one year is called compounding...

12. Non annual compounding period The number of compounding periods in one year is called compounding frequency. The compounding frequency affects both the present and future values of cash flows. An investor can invest money with a particular bank and earn a stated interest rate of 13.20%; however, interest will be compounded quarterly. What are the nominal (or stated), periodic, and effective interest rates for this investment opportunity? Interest Rates Nominal rate Periodic rate Effective annual rate ...

All else equal, less frequent compounding results in which ofthe following?larger number of periods...

All else equal, less frequent compounding results in which of the following?larger number of periods per yearlower present valueslower effective annual rateshigher future values2. You have an investment account that is starting with $1200. You would like the account to grow to $7500, and you can earn 6% interest annually. Assume you make no additional contributions to the account. Assume an annually compounded interest rate. How many years will you need to wait? (round to two decimals)32.99 years8.07 years29.78 years5.47...

Multiple compounding periods: Samantha is looking to invest some money, so that she has $5,500 at...

Multiple compounding periods: Samantha is looking to invest some money, so that she has $5,500 at the end of three years. Which investment should she make given the following choices: a. 4.2% compounded daily b. 4.9% compounded monthly c. 5.2% compounded quarterly d. 5.4% compounded annually

Can someone please explain in simple terms 1. the impact of compounding frequency and 2. the...

Can someone please explain in simple terms 1. the impact of compounding frequency and 2. the difference between annual percentage rate and the effective annual rate. PLEASE ANSWER BOTH 1 AND 2 FOR ME

How do you forecast the items on the cash flows statement for future periods? Please add...

How do you forecast the items on the cash flows statement for future periods? Please add an example.

Discuss the difference between growing annuity and growing perpetuity. Provide an example of each. Also explain...

Discuss the difference between growing annuity and growing perpetuity. Provide an example of each. Also explain the annuity transformation method.

Applies TVM techniques using multiple compounding periods per year. 1.) You are saving for retirement and...

Applies TVM techniques using multiple compounding periods per year. 1.) You are saving for retirement and have the opportunity to invest in a security that pays a 12% annual rate of return, compounded quarterly. If you invest $100,000 in the security now how much will you have in your retirement account at the end of 10 years? 2.) Would it be better for your retirement account if the returns on the security were simply compounded once a year? (5 points)...

QUESTION13 he required return is 8.9% APY (EAR). You expect the following cash flows to be...

QUESTION13 he required return is 8.9% APY (EAR). You expect the following cash flows to be received in the years indicaed: negative 1680 today, 1950 in year 1, negative 841 in year 3, and 1027 in year 4. What is the combined present value of all of these cash flows, that is, what is their net present value? (Rounded to the nearest 10 cents.) nothing What is their combined value at time 3? (Rounded to the nearest 10...