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115.114 Finance Fundamentals Cheat Sheet (DRAFT) by

Glossary of theories and concepts.

This is a draft cheat sheet. It is a work in progress and is not finished yet.

Chpt4. TVM-Single Payments

Time Value of money
Indivi­duals prefer to receive a dollar today to receiving that same dollar promised in a year's time.
 
Interest
The cost of funds to a borrower or part of the return for a lender or investor
Mortgage
recover money by selling property
Term Loan
bank loan with maturitydue date

4.1 Simple Interest & Future Value

Future Value
amount received later; cash value of investment at future date: 
FV=P(1+rn)
Simple Interest
Interest calculated on the original amount: 
I=(P)(­r)(n)
Money Markets
short-term debt markets: companies can borrow/ invest in the short-­term.
Formula
 
FV = P(1 + rn)

4.2 Simple Interest & Present Value

Present Value
amount today: needed cash today, to yield a particular value at future.
Discounts
to find the present value of future amount: inverse for compou­nding interest.
Formula
 
PV = FV/(1+rn)
Working out/ Calcul­ating how much the money we expect to receive in the future is worth today.

4.3 Compound Interest & FV

Compounded Interest
Interest is stacking: It is then added to the principal
Compou­nding
Process of finding future amounts where interest is paid on interest already earned.
Opport­unity Cost
best market yield achieve through altern­ative course of action: Market Yield is often benchm­arked for opport­unity costs
Formula
 
FV = PV(1+r)n
Working out/ calcul­ating future value through interest for each period (plus any interest), then added to the principal.

4.4 PV of a single payment

Discou­nting
The process of finding current amounts by the process of present value.
Formula
 
PV = FV / (1+r)n
Formula2
 
PV = FV x (1+r)-n

4.5 Compou­nding frequency

Coupon
Interest paid, based on a percentage of a bond's face value.
Zero- coupon Bond
single­-pa­yment: no interest payment during its lifetime since interest is included with the repayment of principal at maturity.
Maturity
Deadline:The date when security will be payed.
Formula
 
FV = PV x (1 + r/m)m x n
Formula2
 
PV = FV / (1 + r/m)m x n
When compou­nding period per year is increased by semi-a­nnu­ally, quarterly, monthly or daily.

PV formula can be used to calculate the current value of a zero-c­oupon bond.

4.6 Continuous compou­nding/ discou­nting

Formula
 
FV = PV (PV x er x n)
or
 
FV = PVern
When compou­nding frequency is increased to a very large number of (infin­ity).

Where e is constant, e = 2.718

4.7 Nominal & Effective Interest Rates

Nominal Rate
contra­ctual rate, ignores compou­nding. includes inflation: quoted rate
Effective Rate
actual rate, accounts compou­nding. includes adjust­ments: adjust­ments to nominal rate for the frequency of compou­nding.
Annual Percentage Rate (APR)
contra­ctual rate, ignores compou­nding. when short-term rates are annualized
Rate of Return
rate of profit/ loss from investment
Formula
 
re = (1 + r/m)m - 1

4.8 Unknown Interest Rate

Formula
 
r = (FV/PV)1/n - 1
FV and PV is given, but find interest rate.