Finance Chapter 5

How to amortize a loan

1. Pay principal and interest every period in a fixed payment 2. Pay the interest each period plus some fixed amount of the principal

When finding the present or future value of an annuity using a financial calculator the interest rate should be entered as

A percentage

The interest rate charged per period multiplied by the number of periods per year is the

Annual percentage rate

Leases, mortgages and pensions are examples of what

Annuities

With typical interest only loans, the entire principal is repaid when

At some point in the future

An annuity due is a series of payments that are made when

At the beginning of each period

This annual rate will express this rate as though it were compounded annually

Effective annual rate

Spreadsheet functions used to calculate the present value of multiple cash flows assume, by default, that all cash flows occur at the ______ of the period

End

Not a way to amortize a loan

Fixed interest payments only

A perpetuity is constant stream of cash flows for how long

Infinite period of time

An ordinary annuity consists of a(n) ____ stream of cash flows for a fixed period of time

Level

These are examples of what could not be evaluated as annuities or annuities due

Monthly electric bills, tips to a waiter

The present value of an annuity due is equal to the present value of what annuity multiplied by (1+r)

Ordinary

A constant stream of cash flows forever

Perpetuity

C/r is the formula for the present value of

Perpetuity

Present value formula for this is PV= C/r where C is constant and regularly timed cash flow to infinity, and r is the interest rate

Perpetuity

The original amount of a loan is termed the loan

Principal

The simplest form of loan

Pure discount loan

if you borrow $15,000 today at 5% annual interest to be repaid in one year as a lump sum, this is termed

Pure discount loan

An interest rate expressed in terms of the interest payment made each period is an

Quoted interest rate & Stated interest rate

The most common way to repay a loan is to pay

Single fixed payment every period

The first cash flow at the end of week 1 is $100, the second cash flow at the end of month 2 is $100 and the third cash flow at the end of year 3 is $100. Which type of cash flow pattern is this?

Uneven