Chapter 5 Concept Questions
What is a pure discount loan?
A pure discount loan is a loan where the loan amount represents the present value of the loan amount that will be repaid.
What is an APR? What is in EAR? Are they the same thing?
An APR is that interest rate per period multiplied by the number of periods per year. An EAR is the interest rate expressed as if it were compounded once per year. The APR and EAR are the same only when compounding occurs annually.
What does it mean to amortize a loan?
And amortized loan is one in which some principle reduction occurs with each payment.
What is the relationship between a stated interest rate & an effective interest-rate? Which is more relevant for financial decisions?
That EAR is higher than the APR except when compounding occurs on an annual basis; in that instance they are the same. That EAR is more relevant for financial decisions because it indicates what is actually being earned or charged.
In general what is the present value of an annuity of C dollars per period at a discount rate of R per period?
The present value of $C per period at a discount rate of "r" is C X{[1-(1+r)^t]/r}; The future value is C X {[(1+r)^t]-1/r}
What is the present value of a perpetuity?
The present value of a perpetuity is C/r
If an interest rate is given as 12% compounded daily, what do we call this rate?
When ever a quoted rate is accompanied by the compounding frequency that really is an annual percentage rate, or APR, provided that rate is for an entire year.