Finance ch 6

Annuity A level stream of cash flows for a fixed period of time. Occurs at the end of each period for a certain number of periods.
Annuity due A level stream of cash flows that occur at the beginning of each period.
Perpetuity A cash flow that continues forever.
Consol A type of perpetuity
Growing perpetuity A constant stream of cash flows without end that is expected to rise indefinitely.
Compounding The process of reinvesting the interests.
Growing annuity A finite number of growing annual cash flows.
Stated interest rate Also know as quoted interest rate, is expressed in terms of the interest payment made each period. It doesn’t include compounding.
Effective annual rate The interest rate expressed as if it were compounded once per year. Factors in compounding. More compounds equals higher _________.
Annual percentage rate Is the interest rate charged per period, multiplied by the number of periods per year.
Continuous compounding When the compounding period gets shorter ans shorter, such that it is even shorter than one second.
Pure discount loans Borrower receives money today, repays a single lump sum to the lender on the maturity date. Common when loan term is short.
Interest only loans Borrower receives money today, pays interest every period, and repays the entire principal amount on maturity date. Examples are bonds issued by the government, provinces, and corporations.
Amortized loans Borrower receives money today and pay interest and a portion of the principal every period. Common with long term loans.

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