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Social Science
Economics
Finance
Accounting 2 Chapter 11
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Terms in this set (25)
Return of investment
the return of the amount initially invested, how much of the original investment did you earn back
Return on investment
The money received in excess of the initial investment, the amount past the original investment that you earned
Time Considerations
Given two investments the investment held for the linger period of time will generate a greater return, the investment that is started first will earn more money because of interest
Initial investment consideration
The investment with the larger initial amount will generate a greater return, the investment that has more money in it at the beginning will earn more than the other because of interest
Expected rate of return
the expected summery measure of an investment's performance. Is a percent based on the possible rate of return and on the likelihood of those rates of return occurring.
What is the formal for the expected return?
Expected Return = Possible outcomes x Probability
Actual rate of return
collected after the investment period has passed. Is a percent that measures the performance of investments on a common-size basis
Actual rate of return equation
Actual rate of return = (dollar amount of return on investment) / (dollar amount of initial investment)
Annual rate of return
A return percentage based on a one-year time period
Risk
The exposure to the chance that an unfavorable outcome will occur at some future point in time
What are they types of risk
Inflation risk
Business risk
Liquidity risk
Inflation risk
Decline in the purchasing power of the monetary units (how much money the business has available to invest)
Business risk
The ability to continue in business (whether or not a business is able to convert their production/operation cost)
Liquidity risk
The chance that an investment cannot be readily converted to cash. (how much a business can cover their debts by converting their investments into cash)
Risk-free rate of return
the rate that a virtually risk-free investment produces
Time value of money:
Determines the cash equivalent today of cash flows that will occur at some point in time in the future
Interest
The payment for the use of money
Simple interest
Interest = Principal x Rate x Time
Compound interest
interest collected from previous time periods as interest placed on top of it
Future value of the Amount of $1
what amount will be investing $1 become
Present value of the amount of $1
What is $1 in the future work today
Future value of an (ordinary) annuity:
The amount of money that accumulates at some future date as a result of making equal payments
Annuity
a series of equal regular deposits
Present value of an (ordinary) annuity
how much must be received today to generate a series of equal payments in the future
The four-step process of solving time value of money problems
1.) Determine whether the problem is an annuity
2.) Determine whether the problem is present of future value
3.) Identify the missing element
4.) Solve for the missing element
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