2.2 Financial mathematics I

Question 1

What is discounting?

Answer 1

the factor (1+i)^n, needed to know to adjust to changing interest rates

Question 2

What is an annuity?

Answer 2

• A sequence of EQUAL payments made at FIXED TIMES for a specified number of periods
• different types of annuities => ordinary annuity, annuity due, deferred annuity

Question 3

What is an ordinary annuity, an annuity due, and a deferred annuity?

Answer 3

• Ordinary annuity: payments are made at the end of the year
• Annuity due: payments paid at the beginning of each period
• Deferred annuity: first cash flow occurs AFTER a specific number of periods

Question 4

What securities (ways of securing capital) are the annuities involved in?

Answer 4

• promissory notes
• interest only loans
• Perpetuity

Question 5

What is a promissory note?

Answer 5

fixed single payment in the future (occurs at end of period)

Question 6

What are interest only loans?

Answer 6

interest paid, that is determined relative to principal and interest rates (typical annuity structure)

Question 7

What is perpetuity?

Answer 7

annuity with an INFINITE number of payments

PV = X/r