BA323 Brincks Exam 2 Solved 100% Correct!!

§Perpetuity FORMULA - •PV = PMT/I §Sharpe Ratio FORMULA - •(Return - risk-free rate) / standard deviation §CAPM FORMULA - •ri = rRF + (rM - rRF)bi What is the time value of money? - The concept that money you have now is worth more than the identical sum in the future due to its potential earning capacity. §Why is inflation so important for cash flows? - Important for inflation, a dollar is worth more today than in the future due to interest rates increasing. HOW DOES COMPOUNDING INTEREST WORK ? - The arithmetic process of determining the final value of a cash flow or series of cash flows when compound interest is applied Finding the FV of a cash flow or series of cash flows requires compoundingPV->FV(?) HOW DOES DISCOUNTING WORK ? - The process of finding the present value of a cash flow or a series of cash flows; discounting is the reverse of compounding.FV->PV(?) Know how to solve for Time Value Of Money - Solve for FV, PV, I/YR, N (Given 3 pieces of information, solve for the 4th) PMT is set equal to zero with these problems Solve for FV, PV, I/YR, N Know how to solve for the value of an annuity - §With annuities, wither PV or FV is set equal to 0 §PMT is not zero in this type of problemKnow how to solve for Perpetuity - FOREVER CASH FLOW / NO CALCULATOR NEEDED The formula for an annuity that pays a cash flow forever Need to know the formula (can't use calculator) What is a Bond - A long-term debt instrument in which a borrower agrees to make payments of principal and interest, on specific dates, to the holders of the bond.