Chapter 6 Accounting II

Annuities Due

payments are made / received at the beginning of each period

Ordinary Annuity

payments are made / received at the end of each period.

unending equal payments paid at equal time intervals.

A perpetuity is defined as:

pure discount

If a borrower receives money today and must repay the loan in a single lump sum on a future date, the loan is called a(n) ________ loan.

annual percentage rate.

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

Equal principal payments

The most common type of medium-term, amortized business loans has which one of these characteristics over its life?

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

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

Annuity B has a smaller present value than Annuity A.

You are comparing two annuities that offer regular payments of $2,500 for five years and pay .75 percent interest per month. You will purchase one of these today with a single lump sum payment. Annuity A will pay you monthly, starting today, while Annuity B will pay monthly, starting one month from today. Which one of the following statements is correct concerning these two annuities?

Option B has a higher present value at Time 0.

You are comparing two investment options that each pay 6 percent interest compounded annually. Both options will provide you with $12,000 of income. Option A pays $2,000 the first year followed by two annual payments of $5,000 each. Option B pays three annual payments of $4,000 each. Which one of the following statements is correct given these two investment options? Assume a positive discount rate. (No calculations needed.)

Annuity

constant or level cash flows that occurs for a fixed number of periods

Pure Discount Loans

• Borrower receives cash today and repays in full at a later date. (At amount greater than what they got) • Also referred to as "Lump Sum Loan"

perpetuities

• a stream of cash flow that continues forever (into perpetuity)