Finance Chapter 5
How to amortize a loan
1. Pay principal and interest every period in a fixed payment 2. Pay the interest each period plus some fixed amount of the principal
When finding the present or future value of an annuity using a financial calculator the interest rate should be entered as
A percentage
The interest rate charged per period multiplied by the number of periods per year is the
Annual percentage rate
Leases, mortgages and pensions are examples of what
Annuities
With typical interest only loans, the entire principal is repaid when
At some point in the future
An annuity due is a series of payments that are made when
At the beginning of each period
This annual rate will express this rate as though it were compounded annually
Effective annual rate
Spreadsheet functions used to calculate the present value of multiple cash flows assume, by default, that all cash flows occur at the ______ of the period
End
Not a way to amortize a loan
Fixed interest payments only
A perpetuity is constant stream of cash flows for how long
Infinite period of time
An ordinary annuity consists of a(n) ____ stream of cash flows for a fixed period of time
Level
These are examples of what could not be evaluated as annuities or annuities due
Monthly electric bills, tips to a waiter
The present value of an annuity due is equal to the present value of what annuity multiplied by (1+r)
Ordinary
A constant stream of cash flows forever
Perpetuity
C/r is the formula for the present value of
Perpetuity
Present value formula for this is PV= C/r where C is constant and regularly timed cash flow to infinity, and r is the interest rate
Perpetuity
The original amount of a loan is termed the loan
Principal
The simplest form of loan
Pure discount loan
if you borrow $15,000 today at 5% annual interest to be repaid in one year as a lump sum, this is termed
Pure discount loan
An interest rate expressed in terms of the interest payment made each period is an
Quoted interest rate & Stated interest rate
The most common way to repay a loan is to pay
Single fixed payment every period
The first cash flow at the end of week 1 is $100, the second cash flow at the end of month 2 is $100 and the third cash flow at the end of year 3 is $100. Which type of cash flow pattern is this?
Uneven
