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MIDTERM NOTES
-A key assumption while calculating Future Value or Present Value is that investors have
access to capital markets and can borrow/lend at the risk free rate.
-Rule of 72: 72 divided by the interest rate gives the approximate number of years it takes
to double your money.
-Converting to future value is called compounding; Converting to present value is called
discounting.
-Rule of thumb with perpetuities and annuities: there is no cash flow at today; the first cash
flow is always received one year from today
-Simple perpetuity: stream of constant cash flows received forever
-Simple annuity: stream of constant cash flows received for n number of years
-Growing perpetuity: cash flows received forever that grows at the rate of g per year (the PV
formula only works if g < r)
-Growing annuity: cash flows received for n period that grow at the rate of g per year
-Given an APR and a compounding frequency, the effective rate you earn after one year is
called the Effective Annual Rate (EAR)
-EAR increases with compounding frequency
-The Equivalent n-Period Effective Rate gives the effective rate for a period different than
that of one year
-APR (Annual Percentage Rate) indicates the amount of simple interest earned in one year,
that is, the amount of interest earned without the effect of compounding even though
