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Annuity Payment

An annuity is a series of equal cash flows that occur after equal interval of time. If we know the interest rate and number of time periods, we can work out the annuity cash flow that corresponds to a specific present value and/or future value.

Time Value of Uneven Cash Flows

When a cash flow stream is uneven, the present value (PV) and/or future value (FV) of the stream are calculated by finding the PV or FV of each individual cash flow and adding them up.

Types of Interest Rates

An interest rate is a percentage which represents the cost of money as a percentage of initial principal. Interest rates differ depending on whether they are nominal or real, quoted or effective, annual or periodic and so on.

Nominal Interest Rate

Nominal interest rate is the interest rate which includes the effect of inflation. It approximately equals the sum of real interest rate and inflation rate.

Real Interest Rate

Real interest rate is the interest rate adjusted for the effect of inflation on maturity value of a loan or investment. It approximately equals nominal interest rate minus inflation rate.

Quoted vs Periodic Interest

Quoted interest rate (also called nominal interest rate or annual percentage rate) is the non-compounded interest rate for a period of one year. It can be converted to periodic interest rate by dividing it with the number of compounding periods per year.

Time Periods in TVM

In case of simple interest, number of time periods t equals total interest divided by product of PV and interest rate and in case of compound interest, number of periods can be calculated using NPER function or using a logarithm-based formula

Tax Shield

Depreciation tax shield represents reduction in tax outflows when tax laws allow deduction of depreciation expense from taxable income. Interest tax shield refers to the tax-saving advantage of debt form of capital.

Pro Forma Financial Statements

Proforma financial statements are financial statements which provide information about a company’s expected financial performance and financial position in future.

Primary & Secondary Market

A primary market is a market in which corporations sell their securities to investors for the first time. On the other hand, a secondary market is a market in which investors trade the securities already issued with each other.