Finance Formulas / July 16, 2018 / Rory Wise
Economic profit includes the opportunity costs a company loses or gains by making a decision to pursue one avenue towards revenue, thus passing by a different opportunity which also might have produced revenue. A firm can have a large accounting profit, but no economic profit.
For example, an investor starts her own business with $100,000 and earns $120,000 in profits during the first year. Her accounting profit is $20,000. But that same year, she could have earned an income of $45,000 working as an employee for ABC Corporation. The investor’s economic profit for the year is actually a loss of $25,000.
Bond valuation, in effect, is calculating the present value of a bond’s expected future coupon payments. The theoretical fair value of a bond is calculated by discounting the present value of its coupon payments by an appropriate discount rate. The discount rate used is the yield to maturity, which is the rate of return that an investor will get if she reinvested every coupon payment from the bond at a fixed interest rate until the bond matures. It takes into account the price of a bond, par value, coupon rate, and time to maturity.
Annual Percentage rate (APR) explains the cost of borrowing with a variety of loans, including credit cards and mortgage loans. Costs are quoted as a percentage. For example, if your loan has an APR of 10 percent, you would pay $10 per $100 that you borrow each year. All other things being equal, the loan with the lowest APR is typically least expensive—but it’s usually more complicated than that.
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