FIN 3403

Ordinary annuity

A cash flow stream that is created by an investment or loan that requires its cash flows to take place on the last day of each quarter and requires that it last for 10 years.

Perpetuity

A cash flow stream that is generated by a share of preferred stock that is expected to pay dividends every quarter indefinitely.

Discounting

A process that involves calculating the current value of a future cash flow or series of cash flows based on a certain interest rate.

Opportunity cost of funds

A rate that represents the return on an investor's best available alternative investment of equal risk.

Amortization schedule

A schedule or table that reports the amount of principal and the amount of interest that make up each payment made to repay a loan by the end of its regular term.

Annuity due

A series of equal cash flows that occur at the beginning of each of the equally spaced intervals (such as daily, monthly, quarterly, and so on).

Amortized loan

A type of security that is frequently used in mortgages and requires that the loan payment contain both interest and loan principal.

False

After the end of the second year and all other factors remaining equal, a future value based on compound interest will never exceed the future value based on simple interest.

True

All other factors being equal, both the simple interest and the compound interest methods will accrue the same amount of earned interest by the end of the first year.

FV = PV x (1 + I)N

Assume that the variables I, N, and PV represent the interest rate, investment or deposit period, and present value of the amount deposited or invested, respectively. Which equation best represents the calculation of a future value (FV) using: Compound interest?

FV = PV + (PV x I x N)

Assume that the variables I, N, and PV represent the interest rate, investment or deposit period, and present value of the amount deposited or invested, respectively. Which equation best represents the calculation of a future value (FV) using: Simple interest?

True

Everything else held constant, an account that earns compound interest will grow more quickly than an otherwise identical account that earns simple interest.

Which of the following is true about finding the present value of cash flows?

Finding the present value of cash flows tells you how much you need to invest today so that it grows to a given future amount at a specified rate of return.

simple;coumpound

Investments and loans base their interest calculations on one of two possible methods: the______ interest and the _______ interest methods. Both methods apply three variables—the amount of principal, the interest rate, and the investment or deposit period—to the amount deposited or invested in order to compute the amount of interest. However, the two methods differ in their relationship between the variables.

Future value

One of the four major time value of money terms; the amount to which an individual cash flow or series of cash payments or receipts will grow over a period of time when earning interest at a given rate of interest.

Which of the following is true about present value calculations?

Other things remaining equal, the present value of a future cash flow decreases if the discount rate increases.

Time value of money

The concept that states that the timing of the receipt or payment of a cash flow will affect its value to the holder of the cash flow.

The inflation rate indicating the change in average prices

The process for converting present values into future values is called

Which of the following investments that pay will $15,500 in 8 years will have a lower price today?

The security that earns an interest rate of 8.25%.

PMT x {1 - [1/(1 + r)nn]}/r

Time value of money calculations can be solved using a mathematical equation, a financial calculator, or a spreadsheet. Which of the following equations can be used to solve for the present value of an ordinary annuity?