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JMU FIN 345 - Future value of an annuity

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FIN 345 1st Edition Lecture 14Outline of Current Lecture1. Future value of an annuitya. Annuity: a series of payments of equal amounts at equal intervals for a specified number of periodsb. Ordinary (deferred) annuity): an annuity whose payments occur at the end of each periodc. Annuity Due: an annuity whose payments occur at the beginning of each period2. Present value: the value today of a future cash flow or series of cash flowsa. Discounting: the process of finding the present value of a future cash flow or series of future cash flows; it is the reverse of compoundingb. PVAn=the present value of an annuity with n paymentsc. Each payment is discounted, and the sum of the discounted payments is the present value of the annuity3. Uneven cash flow streamsa. A series of cash flows in which the amt varies from one period to the nexti. Payment PMT designates constant cash flows – an annuity streamii. Cash flow CF designates cash flows in general, both constant cash flows and uneven cash flows4. Semiannual and other compounding periodsa. Annual compounding is the process of determining the future (present) value of a cash flow or series of cash flows when interest is added (computed) once a yearb. Semiannual compounding is the process of determining the future (present) value of a cash flow or series of cash flows when interest is added (computed) twice a year5. Compoundinga. Will the FV of a lump sum be larger or smaller if we compound more often, holding the stated r constant?i. If compounding is more frequent than once per year – for example, semiannually, quarterly, or daily – interest is earned on interest. Because interest is compounded more often, the future value will be larger6. Amortized LoansThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.a. A loan that is repaid in equal payments over its life; payment includes both principal repayment and interestb. Amortization tables are widely used to determine how much of each payment represents principal repayment and how much represents interestc. Financial calculators and spreadsheets can be used to set up amortization tables7. How are dollars from different time periods compared when making financial decisions?a. Dollars from different time periods must be stated in the same Time Value before they can be comparedb. Dollars can be translated into the same time period by computing either present value or future


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