# IMC: CHAPTER 2

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Simple Interest
Simple interest is calculated on the original principal amount only. E.g.1,000 deposit over 3 years at 5% would be £150 of interest.
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Compound Interest
Assumes that interest earned for one period is 'rolled over' into the next periods- i.e. reinvested. E.g. 1,000 deposit over 3 years at 5% would be £1,157.63.
TV=PV(1+r)n
If the frequency of compounding increases, e.g. at quarterly intervals, then incre
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Reinvestment return
The additional income generated through reinvesting income. This is the difference between the simple interest income and the compound interest income.
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Continuous Compounding
Compounded continuously, millisecond by millisecond
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Discounting
Calculating the PV to invest today.
PV = TV/(1+r)n
e.g. 1000/1.05^3= 863.84
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Annuities
Refer to a series of cash payments that are received at regular intervals over a specified period of time.
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PV Annuity Formula (and what to do for mortgages)
PV Annuity = £x * 1/r (1 - 1/1+r^n)
For mortgages you have the PV annuity you need to work out the cashflow.
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Perpetuities
A series of cash payments received at regular intervals over an unspecified period of time.
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PV Perpetuity formula
PV = £x / r
Will get different inputs for this formula per question. 'What is the fair value of the share'
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Annual Percentage Rate formula (Simple interest rate into a compound rate)
APR = (1 + Monthly Rate)^12 - 1
Work out the monthly rate by dividing the per annum simple rate by 12 months. E.g. 18% to 1.5%
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A compound rate into a simple rate
^n Sq root 1+APR -1
n= how many months e.g. 12
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Discounted cash flow technique : Net present value approach
PVi = PVo

Equal or greater than zero then the project goes ahead.
Net present value is present value of inflows less present value of outflows
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Discounted cash flow technique: Internal Rate of Return
IRR is the discount rate that when applied to the cash flows of a project, will equate to the present value of the cash inflows with the present value of the cash outflows.
if the companys cost of capital is lower than the projects IRR, it should be acce
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Limitations to IRR
1) Ignores the quantity of earnings
2) Cannot be used when the discount rate is variable
3) Can result in multiple IRRs
4) if big difference between IRR and discount rate, can result in conflicting decisions
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## Other cards in this set

### Card 2

#### Front

Assumes that interest earned for one period is 'rolled over' into the next periods- i.e. reinvested. E.g. 1,000 deposit over 3 years at 5% would be £1,157.63.
TV=PV(1+r)n
If the frequency of compounding increases, e.g. at quarterly intervals, then incre

#### Back

Compound Interest

### Card 3

#### Front

The additional income generated through reinvesting income. This is the difference between the simple interest income and the compound interest income.

### Card 4

#### Front

Compounded continuously, millisecond by millisecond

### Card 5

#### Front

Calculating the PV to invest today.
PV = TV/(1+r)n
e.g. 1000/1.05^3= 863.84

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