finance 450 ch. 4

END

***with perpetuity, the first payment is assumed to begin at the ______ of the first period***

1. a constant discount rate 2. the END of the first period

2 VERY important rules involving perpetuity & annuity: 1. Equal payments over equal periods of time evaluated at a constant ________ _____. 2. The first payment is assumed to begin at the ______ of the first period.

annuity

a series of equal cash flows over a fixed period of time. -valued as the difference of two perpetuities with different starting points

perpetuity

a series of equal cash flows over equal periods of time that go on forever

HIGHER

also, holding all other terms the same, the PV (and FV) of an annuity due will be ______ than the PV (and FV) of an ordinary annuity (given a positive i)

annuity due

another type of annuity structure is an "_______ ____" this just means that the payments are at the beginning of the period. -examples of this situation would be rent and lease situations (your rent is due at the beginning of the month). annuity due situations can also be evaluated in the present or future **since you're paying earlier, all you have to do in both cases in multiply by an additional (1+i).

a. direct b. direct c. inverse d. direct e. direct f. inverse g. direct h. direct i. inverse j. direct

direct or inverse relationship? a. PV perpetuity & payment b. FVa and N c. PVperpetutity & interest rate d. PVa and N e. FVa and interest rate f. PVa and interest rate g. PVa and payment h. FVa and payment i. PVa and discounting frequency j. FV and compounding frequency

more

for a given PV (or FV), the payment of an annuity would need to be _______ than that of an annuity due to meet the same goal.

one additional payment

the difference between a perpetuity and a perpetuity that starts today is ____ _______ ___________.

one period of interest

the difference between an annuity and annuity due is what?

END of the period; these are also called deferred annuities

the traditional, or ordinary, annuity assumes that payments occur at the _____ of the periods beginning with the end of the first period. these annuities are also called _______ annuities. -It's the most common situation: car payments, house payments, student loans, etc.

PMT [ 1/i -- 1/i(1+i)^N ]

what is the formula to find the present value of an annuity?

PMT/IR

what is the formula to find the present value of perpetuity?