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Amortization calculator
An amortization calculator is used to determine the periodic payment amount due on a loan (typically a mortgage), based on the amortization process. The amortization repayment model factors varying amounts of both interest and principal into every installment, though the total amount of each payment is the same. An amortization calculator can also reveal the exact dollar amount that goes towards interest and the exact dollar amount that goes towards principal out of each individual payment. The amortization schedule is a table delineating these figures across the duration of the loan in chronological order. final version: 13.11.2006 21:14, |
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Annuity Due
An annuity-due is an annuity whose payments are made at the beginning of each period. Because each annuity payment is allowed to compound for one extra period, the value of an annuity-due is equal to the value of the corresponding ordinary annuity multiplied by (1+r). Thus, the present value of an annuity-due can be calculated through the formula final version: 03.11.2006 18:21, |
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Cash accumulation equation
The cash accumulation equation is an equation which calculates how much money will be in a bank account, at any point in time. The account pays interest, and is being fed a steady trickle of money. final version: 13.11.2006 21:36, |
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Discount: net present value
In finance (studies and addresses the ways in which individuals, businesses and organizations raise, allocate and use monetary resources over time, taking into account the risks entailed in their projects) and economics, discounting is the process of finding the present value of an amount of cash at some future date, and along with compounding cash forms the basis of time value of money calculations. The discounted value of a cash flow is determined by reducing its value by the appropriate discount rate for each unit of time between the time when the cashflow is to be valued to the time of the cash flow. Most often the discount rate is expressed as an annual rate. To calculate the net present value of a single cash flow, it is divided by one plus the interest rate for each period of time that will pass. This is expressed mathematically as raising the divisor to the power of the number of units of time. Net present value (NPV) is a standard method for financial evaluation of long-term projects. Used for capital budgeting, and widely throughout economics, it measures the excess or shortfall of cash flows, in present value (PV) terms, once financing charges are met. All projects with a positive NPV are profitable, however this does not necessarily mean that they should be undertaken since NPV does not account for opportunity cost. Assuming a firm aims to maximise profit, projects should only be undertaken if their NPV is greater than the opportunity cost. final version: 02.01.2007 17:13, |
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double money in a given time
Similarly, the present value formula can be rearranged to determine what rate of return is needed to accumulate a given amount from an investment. For example, $100 is invested today and $200 return is expected in five years; what rate of return (interest rate) does this represent? The present value formula restated in terms of the interest rate is: r = (FV/PV) ^ (1/n) -1 final version: 20.11.2006 18:02, |
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double money with a given interest
Solving for the period needed to double money Consider a deposit of $100 placed at 10% (annual). How many years are needed for the value of the deposit to double to $200? The present value formula can be rearranged such that: y = ln(FV/PV) / ln(1+r) final version: 20.11.2006 20:44, |
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Equivalent annual cost
In finance the equivalent annual cost (EAC) is the cost per year of owning and operating an asset over its entire lifespan. EAC is often used as a decision making tool in capital budgeting when comparing investment projects of unequal lifespans. For example if project A has an expected lifetime of 7 years, and project B has an expected lifetime of 11 years it would be improper to simply compare the net present values (NPVs) of the two projects, unless neither project could be repeated. The use of the EAC method implies that the project will be replaced by an identical project. A practical example: A manager must decide on which machine to purchase: final version: 05.01.2007 19:34, |
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Future value
Future value measures what money is worth at a specified time in the future assuming a certain interest rate. This is used in time value of money calculations. final version: 14.11.2006 22:31, |
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Hyperbolic discounting
In behavioral economics, hyperbolic discounting refers to the empirical finding that people generally prefer smaller payoffs to larger payoffs when the smaller payoffs come sooner in time than the larger; when all the payoffs are either distant or proximal in time, people tend to prefer the larger. The phenomenon of hyperbolic discounting was first discovered and the term first used by Richard Herrnstein in experiments involving pigeons and food (Chung and Herrnstein, 1967) and later reproduced with human subjects. For instance, when offered the choice between $50 now and $100 a year from now, most people will choose the immediate $50. However, given the choice between $50 in five years or $100 in six years most people will choose $100 in six years. In addition, given the choice between $50 today or $100 tomorrow, most people will choose $100 tomorrow. The functional equation for hyperbolic discounting is as follows: v = V / (1 + kD) final version: 20.11.2006 21:14, |
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Ordinary Annuity
An ordinary annuity (also referred as annuity-immediate) is an annuity whose payments are made at the end of each period (e.g. a month, a year). The present value of an ordinary annuity can be calculated through the formula final version: 03.11.2006 18:23, |
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Present value of a future sum
The present value formula is the core formula for the time value of money; each of the other formulae is derived from this formula. For example, the annuity formula is the sum of a series of present value calculations. final version: 20.11.2006 21:03, |
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Quantity theory of money
In economics, the velocity of money refers to a key term in the quantity theory of money, which centers on the equation of exchange: M*V = P*Q where M is the total amount of money in circulation in an economy at any one time (say, on average during a month). V is the velocity of money, i.e., how often each unit of money is spent during the month. This reflects financial institutions and other economic conditions. P is the average price level for the economy during the month. Q is the total number of items purchased during the month with the particular kind of money represented by M final version: 07.12.2006 15:31, |
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Rating Calculation
Estimates a rating and cost of debt based on the coverage of debt by an organization final version: 09.12.2006 13:04, |
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ROI - Return on Investment - Rate of return
Rate of Return or Return on Investment (ROI) is the ratio of money gained or lost on an investment to the amount of money invested. The amount of money gained or lost may be referred to as interest, profit/loss, gain/loss, or net income/loss. The money invested may be referred to as the asset, capital, principal, or the cost basis of the investment. ROI is also known as rate of profit, rate of return or return. Return can also refer to the dollar amount of gain or loss. ROI is the return on a past or current investment, or the estimated return on a future investment. ROI is usually given as a percent rather than decimal value. ROI does not indicate how long an investment is held. However, ROI is most often stated as an annual or annualized rate of return, and it is most often stated for a calendar or fiscal year. In this article, “ROI” indicates an annual or annualized rate of return, unless otherwise noted. final version: 27.11.2006 08:28, |
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WACC - Weighted average cost of capital
The weighted average cost of capital (WACC) is used in finance to measure a firm's cost of capital. It has been used by many firms in the past as a discount rate for financed projects, since the cost of the financing seems like a logical price tag to put on it. Corporations raise money from two main sources: equity and debt. Thus the capital structure of a firm comprises three main components: preferred equity, common equity and debt (typically bonds and notes). The WACC takes into account the relative weights of each component of the capital structure and presents the expected cost of new capital for a firm. final version: 09.12.2006 23:19, |
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