FINC 3610 Exam 2 (Dismukes)\\\ FINC 3610
Exam 2 (Dismukes) 2025 – Complete Study
Guide & Key Concepts
Perpetuity
a level stream of cash flows which continue forever
- less common than annuity
Present Value of a Perpetuity/No Growth Dividend
PV = CF / r
Present Value of a Growing Perpetuity/Constant Growth Dividend
PV = CF / r-g
Annuity
A level stream of cash flows for a fixed period of time
- at end of period
Annuity Due
an annuity for which the cash flows occur at the beginning of the period
-
PV of Annuity Due =
(PV Ordinary Annuity) x (1+r)
Annual Percentage Rate (APR)
the nominal, stated annual interest rate that ignores the effect of compound interest within the year
- periodic rate (r) x # of compoundings per year (m)
Effective Annual Rate (EAR)
takes into account the effect of compound interest
EAR formula
= [ 1 + (APR/m) ]^m - 1
Amortized Loans
, - PMT stays same (no change)
- lot of early interest that decreases over time
- loan balance getting paid off
An annuity is a level stream of cash flows for a _______ period of time, while a perpetuity is a level
stream of cash flows that continues _________.
fixed; forever
Which of the following is false regarding an amortized loan?
the interest amount will be the same every period
Coupon
The stated interest payment made on a bond
- used for PMT
Face Vaue
The principal amount of a bond that is repaid at the end of the term
- par value
- will be stated
Coupon Rate
The annual coupon / face value of a bond
Maturity
Specific date on which the principal amount of a bond (i.e., the face value) is repaid
Yield to Maturity (YTM)
- the rate required in the market on the bond
- the yield
- the "r" we use
- often not the same as the coupon rate.
The price of a bond is equal to the ____________________ of the bonds
__________________________
present value; future cashflows
Current Yield
Annual coupon / current price
- not same as coupon rate
- not YTM
When bond's coupon rate is ___________ YTM, the bond's price (market value) will be greater than its
par value
Exam 2 (Dismukes) 2025 – Complete Study
Guide & Key Concepts
Perpetuity
a level stream of cash flows which continue forever
- less common than annuity
Present Value of a Perpetuity/No Growth Dividend
PV = CF / r
Present Value of a Growing Perpetuity/Constant Growth Dividend
PV = CF / r-g
Annuity
A level stream of cash flows for a fixed period of time
- at end of period
Annuity Due
an annuity for which the cash flows occur at the beginning of the period
-
PV of Annuity Due =
(PV Ordinary Annuity) x (1+r)
Annual Percentage Rate (APR)
the nominal, stated annual interest rate that ignores the effect of compound interest within the year
- periodic rate (r) x # of compoundings per year (m)
Effective Annual Rate (EAR)
takes into account the effect of compound interest
EAR formula
= [ 1 + (APR/m) ]^m - 1
Amortized Loans
, - PMT stays same (no change)
- lot of early interest that decreases over time
- loan balance getting paid off
An annuity is a level stream of cash flows for a _______ period of time, while a perpetuity is a level
stream of cash flows that continues _________.
fixed; forever
Which of the following is false regarding an amortized loan?
the interest amount will be the same every period
Coupon
The stated interest payment made on a bond
- used for PMT
Face Vaue
The principal amount of a bond that is repaid at the end of the term
- par value
- will be stated
Coupon Rate
The annual coupon / face value of a bond
Maturity
Specific date on which the principal amount of a bond (i.e., the face value) is repaid
Yield to Maturity (YTM)
- the rate required in the market on the bond
- the yield
- the "r" we use
- often not the same as the coupon rate.
The price of a bond is equal to the ____________________ of the bonds
__________________________
present value; future cashflows
Current Yield
Annual coupon / current price
- not same as coupon rate
- not YTM
When bond's coupon rate is ___________ YTM, the bond's price (market value) will be greater than its
par value
