Question

Discounting		A.	A concept that maintains that the owner of a cash flow will value it differently, depending on when it occurs.
Time value of money		B.	The name given to the amount to which a cash flow, or a series of cash flows, will grow over a given period of time when compounded at a given rate of interest.
Amortized loan		C.	A type of security that is frequently used in mortgages and requires that the loan payment contain both interest and loan principal.
Ordinary annuity		D.	A value that represents the interest paid by borrowers or earned by lenders, expressed as a percentage of the amount borrowed or invested over a 12-month period.
Annual percentage rate		E.	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.
Annuity due		F.	A table that reports the results of the disaggregation of each payment on an amortized loan, such as a mortgage, into its interest and loan repayment components.
Perpetuity		G.	A process that involves calculating the current value of a future cash flow or series of cash flows based on a certain interest rate.
Future value		H.	A rate that represents the return on an investor’s best available alternative investment of equal risk.
Amortization schedule		I.	A series of equal (constant) cash flows (receipts or payments) that are expected to continue forever.
Opportunity cost of funds		J.	A cash flow stream that is created by a lease that requires the payment to be paid on the first of each month and a lease period of three years.

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 future value of an ordinary annuity?

PMT x {[(1 + r)nn – 1]/r}

PMT x {1 – [1/(1 + r)nn]}/r

PMT x {[(1 + r)nn – 1]/r} x (1 + r)

FV/(1 + r)n

Answer 1

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

Time value of money - A. A concept that maintains that the owner of a cash flow will value it differently, depending on when it occurs.

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

Ordinary annuity - E.  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.

Annual percentage rate - D. A value that represents the interest paid by borrowers or earned by lenders, expressed as a percentage of the amount borrowed or invested over a 12-month period.

Annuity due - J. cash flow stream that is created by a lease that requires the payment to be paid on the first of each month and a lease period of three years.

Perpetuity - I.  series of equal (constant) cash flows (receipts or payments) that are expected to continue forever.

Future value - B.  name given to the amount to which a cash flow, or a series of cash flows, will grow over a given period of time when compounded at a given rate of interest.

Amortisation schedule - F. A table that reports the results of the disaggregation of each payment on an amortized loan, such as a mortgage, into its interest and loan repayment components.

Opportunity cost of funds - H. A rate that represents the return on an investor’s best available alternative investment of equal risk.

Formula for FV of annuity = PMT x {[(1 + r)nn – 1]/r}