What are the four parts of the basic present value equation?

What are the four basic present value equation parts? The four parts are the present value (PV), the future value (FV), the discount rate (r), and the life of the investment (t). What is compounding? Compounding refers to the growth of a dollar amount through time via reinvestment of interest earned.

What is the process of finding present value called?

The process of finding the FV is often called capitalization. On the other hand, the present value (PV) is the value on a given date of a payment or series of payments made at other times. The process of finding the PV from the FV is called discounting .

What do you think about the state lottery discussed in the chapter advertising a $500000 prize when the lump sum option is $250000 is it deceptive advertising?

What do you think about the Tri-State Megabucks lottery discussed in the chapter advertising a $500,000 prize when the lump sum option is $250,000? Yes, because the present value of the $500,000 prize is less than $250,000 when discounted back.

What do you think about the Tri-State Megabucks lottery discussed in the chapter?

what do you think about the tri-state megabucks lottery discussed in the chapter advertising a 50,000 prize when the lump sum option is 250,000? is it deceptive advertising? It’s deceptive, but very common. the deception is particularly irritating given that such lotteries are usually government sponsored.

What is the difference between present value and present value of an annuity?

A future annuity is one that begins to pay out after its accumulation period, while the present cash value of an annuity is the current value of these future payments.

What is ordinary annuity?

An ordinary annuity is a series of equal payments made at the end of consecutive periods over a fixed length of time. While the payments in an ordinary annuity can be made as frequently as every week, in practice they are generally made monthly, quarterly, semi-annually, or annually.

How do you find the present value of an annuity?

The formula for determining the present value of an annuity is PV = dollar amount of an individual annuity payment multiplied by P = PMT * [1 – [ (1 / 1+r)^n] / r] where: P = Present value of your annuity stream. PMT = Dollar amount of each payment. r = Discount or interest rate.

What is present value annuity?

The present value of an annuity is the current value of future payments from an annuity, given a specified rate of return, or discount rate. The higher the discount rate, the lower the present value of the annuity.

What are the differences between an ordinary annuity an annuity due and perpetuity?

An annuity is a finite stream of cash flows received or paid at specified intervals, whereas Perpetuity is a sort of ordinary Annuity that will last forever, into Perpetuity. An annuity can further be defined in two types, i.e., Ordinary Annuity and Annuity Due.

What happens to future value of an annuity if you increase the rate r?

What happens to the future value of an annuity if you increase the rate r? Assuming positive cash flows and interest rates, the future value will rise. Assuming a positive interest rate, the future value of an ordinary due will always higher than the future value of an ordinary annuity.

What happens to the future value of a perpetuity if interest rates increase what if the interest rate decrease?

Assuming positive cash flows, the present value will fall and the future value will rise. [Perpetuity Values] What happens to the future value of a perpetuity if interest rates increase? The future value of a perpetuity is undefined since the payments are perpetual.

What are the four types of annuities?

There are four basic types of annuities to meet your needs: immediate fixed, immediate variable, deferred fixed, and deferred variable annuities. These four types are based on two primary factors: when you want to start receiving payments and how you would like your annuity to grow.

What is the ‘present value of an annuity’?

What is the ‘Present Value Of An Annuity’. The present value of an annuity is the current value of future payments from an annuity, given a specified rate of return or discount rate. The annuity’s future cash flows are discounted at the discount rate. Thus, the higher the discount rate, the lower the present value of the annuity.

What does PMT stand for in annuities?

where: P = Present value of an annuity stream PMT = Dollar amount of each annuity payment r = Interest rate (also known as discount rate) n = Number of periods in which payments will be made. ​.

What is an example of an ordinary annuity?

An example of an ordinary annuity includes loans, such as mortgages. The payment for an annuity due is made at the beginning of each period. A common example of an annuity due payment is rent. This variance in when the payments are made results in different present and future value calculations.

What is the average discount rate for annuities?

A discount rate directly affects the value of an annuity and how much money you receive from a purchasing company. Standard discount rates range between 9 percent and 18 percent. They can be higher, but they usually fall somewhere in the middle.