The zero coupon bond price is the present value of all future cash flows expected from the bond. For a zero coupon bond, there are no periodic interest payments, and the only cash flow is the face value of the bond received by the investor at the maturity date. In order to receive a return on their investment a zero coupon bond must be issued to investors at a deep discount.
As regular payments will clear a loan balance over the term, the present value (PV) of the payments must be equal to the value of the loan. It follows that the remaining balance on an loan can be calculated by calculating the present value (PV) of the outstanding loan repayments.
In order to decide whether it is worth undertaking an MBA (or other) program, it is necessary to compare the present value of the cost of undertaking the MBA program, including the loss of earnings, with the present value of the increase in earnings as a result of taking the program.
As the increase in earnings is represented by a series of periodic payments at a compounding discount rate, the increase can be regarded as an annuity, and its present value can be calculated using the present value of an annuity formula.
The debt constant sometimes referred to as the loan constant or mortgage loan constant is the ratio of the constant periodic payment on a loan to the original loan.
The debt service constant is only relevant to loans that have a fixed interest rate over the term of the loan, and is used to make quick calculations of the amount needed to repay a loan over its term, and the balance outstanding on the loan at any point in time.
A mortgage is an interest in a property that is transferred from a borrower (the mortgagor) to a lender (mortgagee) to as security for a mortgage loan. If the lender does not repay the loan then the lender can under certain circumstances take the property.
As we have a series of periodic payments from the lender to the borrower and a periodic compounding interest rate, the mortgage payment can be regarded as an annuity.
A lease is a method of financing the use of an asset, and is an agreement between a lessee (who rents the asset), and a lessor (who owns the asset). The lessor is usually a lease company or finance company.
The lessee rents the asset from the lessor in return for a periodic rental payment. The lessee never owns the asset, and at the end of the term it is returned to the lessor or a secondary period of rental is entered into.
The present value of a growing perpetuity formula is used to calculate the present value of a series of periodic payments which increase at a constant rate each period. The formula can be used as the basis for the Gordon growth model when considering how to value shares and stocks.