Summary And Conclusions

This chapter rounds out your understanding of fundamental concepts related to the time value of money and discounted cash flow valuation. Several important topics were covered, including:

1. There are two ways of calculating present and future values when there are multiple cash flows. Both approaches are straightforward extensions of our earlier analysis of single cash flows.

2. A series of constant cash flows that arrive or are paid at the end of each period is called an ordinary annuity, and we described some useful shortcuts for determining the present and future values of annuities.

3. Interest rates can be quoted in a variety of ways. For financial decisions, it is important that any rates being compared be first converted to effective rates. The relationship between a quoted rate, such as an annual percentage rate (APR), and an effective annual rate (EAR) is given by:

where m is the number of times during the year the money is compounded or, equivalently, the number of payments during the year.

4. Many loans are annuities. The process of providing for a loan to be paid off gradually is called amortizing the loan, and we discussed how amortization schedules are prepared and interpreted.

The principles developed in this chapter will figure prominently in the chapters to come. The reason for this is that most investments, whether they involve real assets or financial assets, can be analyzed using the discounted cash flow (DCF) approach. As a result, the DCF approach is broadly applicable and widely used in practice. For example, the next two chapters show how to value bonds and stocks using an extension of the techniques presented in this chapter. Before going on, therefore, you might want to do some of the problems that follow.

Sell Your Annuity

Sell Your Annuity

Do you have annuity you dont want? Discover When is it Time to Sell Your Annuity? What can I do? Where can I get the money I need? I have an annuity, but I dont know that I can sell it. Is there a good time to sell my annuity? I already have a home improvement loan, but it was used before the roof needed replacing.

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