Term
|
Definition
| 1. A series of fixed payments made on specified dates over a set period |
|
|
Term
|
Definition
| 2. A series of equal periodic payments made at the end of each period |
|
|
Term
|
Definition
| 3. A series of equal periodic payments made at the beginning of each period. |
|
|
Term
|
Definition
| 4. A series of fixed payments made on specified dates over an indefnite period. |
|
|
Term
|
Definition
| 5. A loan that provides a lump sum of money to a borrower today and that is repaid with interest by payment of a single lump sum at a specific future date. |
|
|
Term
|
Definition
| 6. A loan that requires the borrower to make interest payments on a periodic basis during the life of the loan and to repay the original amount of the loan on a specified future date. |
|
|
Term
|
Definition
| 7. A loan that requires the borrower to make payments consisting of both principal and interest over the duration of the loan |
|
|
Term
|
Definition
| 8. An amortized loan with payments based on an amortization period longer than the loan period with the remaining loan balance payable on the due date. |
|
|
Term
| 1. Describe the three common types of annuities. |
|
Definition
1. The three common types of annuities are:
(1) Orinary Annuity: A series of equal periodic pmts made at the end of each period for a specific period of time.
(2) Annuity Due: A series of equal periodic pmts made at the beginning of each period for a specific period of time.
(3) Perpetuity: A series of fixed pmts made on specified dates over an indefinite period. |
|
|
Term
| 2. Id the info needed to compute the future value of an ordinary annuity |
|
Definition
| 2. The info needed to compute the future value of an ordinary annuity includes the pmt amt, the number of intervales over which the annuity is pd and the interest rate at which pmts can earn interest. |
|
|
Term
| 3. Describe two methods of determining the future value of an ordinary annuity. |
|
Definition
3. The following two methods can be used to determe the future value of an ordinary annuity:
(1) Calculate4 the future value of each individual pmt FV = PV x (1+ r)n and then sum the future values calculated. This can be expressed as FVA = A x [(1+r)n-1 + (1+r)n-2 + ...+ (1+r)n-n]
(2) Use a future value table; Multiply the pmt per period by the table value in the r interest rate column at the n period now FVA=A x FVAF |
|
|
Term
| 4. Illustrate how the future value of an annuity formula can be used to determine the period pmt. |
|
Definition
4. The future value of an annuity formula, FVA = A x [(1+r)n-1/r] can be rearranged as follows to dtermine the period pmt:
A = FVA / [(1+r)n-1) / r ] |
|
|
Term
| 5. Describe how to calculate the present value of a series of cash flows. |
|
Definition
5. To calculate the present value of a series of cash flows, calculate the presetn value of each individual pmt and then sum the present values calculated, using the following formula:
PVA = A x [1/(1+r)) + (1 / (1+r)2) +..+ (1/(1+r)n)] |
|
|
Term
| 6. Id the factor that results in the difference in the present value calculations for an annuity due and an ordinary annuity. |
|
Definition
| 6. The difference between the calcualtion of the present value of an annuity due and an ordinary annuity is caused by the differing number of earning periods. An ordinary annuity has one less earning period because of the additional earning period of an annuity due created by recieving pmts at the beginning of the period rather than at the end. |
|
|
Term
| 7. Explain why an understanding of discounted cash flow valuation is important. |
|
Definition
| 7. An understanding of discounted cash flow valuation is important because many business decisions involve multiple cash inflows and outflows over a period of many years. Having a knowledge of discounted cash flow valuation enables an organization to value loans and assess the different forms of repayment of principal and interest. |
|
|
Term
| 8. Id the two activities involved in all loans. |
|
Definition
8. Two activities involved in all loans include:
(1) An amt of money is provided to the borrower by the lender
(2) The loaned amt, plus interest, must be repaid by the borrower to the lender by a specific date |
|
|
Term
| 9. Explain how to use discounted cash flow methods to calculate the present or future value of loan amts. |
|
Definition
9. Discounted cash flow methods can be used to calculate the present or future value of loan amts by using the following values in the future and present value formulas:
(1) Loan repayments are the periodic pmts
(2) Loan duration is the number of years or periods
(3) Interest rate charged is either the interest or discount rate |
|
|
Term
10. Describe the following types of loans:
(a). Pure discount loan
(b)Interest Only Loan
(c) Amortized Loan |
|
Definition
10.The following are common types of loans:
(a). Pure discount loan: Loans the provide a lump sum of money to a borrower today and are repaid with interest by payment of a single lump sum at a specific future date. These loans are generally used for loan periods of less than one year. In effect, the borrower receives the presetn value of the amount to be repaid.
(b)Interest Only Loan: Loans that require the borrower to mke only interest pmts on a periodic basis during the life of the loan and to repay the original amt of the loan on a specified future date. These loans are usually available to short to medium term financing.
(c) Amortized Loan: Loans that require the borrower to make pmts consisting of both principal and interest over the duration of the loan, which will cause the loan to be completely repaid at the end of a specified time period. |
|
|
Term
| 11. Explain how a loan is amortized. |
|
Definition
| 11. A loan is amortized by making variable periodic pmts equal to a fixed periodic loan repaymetn plus the interest due, or by making a fixed total pmt and allocating the pmt between loan repayment and interest. |
|
|
