Finance Exam 2

Perpetuity

an annuity in which the cash flows continue forever.

Annuity due:

an annuity when the first payment occurs at the beginning of the period.

Ordinary annuity

an annuity when the first payment occurs at the end of the period

The interest rate that is most commonly quoted by a lender is referred to as the:

annual percentage rate.

· The present value of a _____ is the future value of the coupons and principal discounted at it's yield to maturity.

bond

The interest earned on both the initial principal and the interest reinvested from prior periods is called:

compound interest.

Cullen invested $5,000 five years ago and earns 6 percent annual interest. By leaving his interest earnings in her account, he increases the amount of interest he earns each year. His investment is best described as benefitting from:

compounding.

Andrew just calculated the present value of a $15,000 bonus he will receive next year. The interest rate he used in his calculation is referred to as the:

discount rate.

Madelyn is calculating the present value of a bonus she will receive next year. The process she is using is called:

discounting.

An ordinary annuity is best defined as:

equal payments paid at the end of regular intervals over a stated time period.

The present value of a ______ is the future value of the cash flows discounted at it's weighted average cost of capital, WACC.

firm

Foreclosure:

if you do not pay the bank, they can take the house.

Your aunt has promised to give you $5,000 when you graduate from college. You expect to graduate three years from now. If you speed up your plans to enable you to graduate two years from now, the present value of the promised gift will:

increase.

Mortgage loan:

loan secured by the collateral of some specified real estate property.

Intrinsic value

It is the discounted value of the cash that can be taken out of a business during its remaining life.

Ceteris Paribus

a Latin phrase that means "all other things held equal"

Growing perpetuity

a growing stream of cash flows that continue forever.

· Growing annuity

a growing stream of cash flows with a fixed maturity.

Interest-only ("balloon payment") loan:

a loan that calls for periodic interest payments and a lump sum principal payment.

Amortized loan:

a loan wherein each payment is equal in amount and includes both interest and principal.

· Annuity:

a series of equal cash flows for a finite period of time.

Discount factor

Represents the PV of one dollar

Discount

The process of calculating the present value of future cash flows.

Which one of the following statements correctly defines a time value of money relationship?

Time and present value are inversely related, all else held constant.

· The present value of a firm's ______ is the future value of the relevant cash flows discounted at it's cost of capital.

project

· The present value of a ________ is the future value of the dividends (and cash flow available to equity holders) discounted at the required rate of return.

share of stock

· The present value of ____ & _____cash flows is the future values discounted at the appropriate discount rate.

single, multiple

Pure discount loan:

the borrower receives money today and repays a single lump sum on a future date.

Annual percentage rate (APR):

the interest rate charged per period multiplied by the number of periods per year. This is the annual rate that is quoted by law.

· Effective annual rate (EAR), annual percentage yield (APY):

the interest rate expressed as if it were compounded once per year. It is the actual rate paid (or received) after accounting for compounding that occurs during the year.

Principal balance:

the original loan amount.

Amortizing:

the process of providing for a loan to be paid off by making regular principal reductions.

Discount rate

the rate used in calculating the present value of future cash flows.