ch. 4

Question 1

compounding

Answer 1

process of determining the future value (FV) of a cash flow or series of cash flows. compounded amount = to beginning amount + interest earned

Question 2

discounting

Answer 2

process of finding the present value (PV) of a future cash flow or a series of cash flows. Reverse of compounding

Question 3

annuity

Answer 3

series of equal periodic payments

Question 4

ordinary annuity

Answer 4

payments occur at the END of each period

Question 5

annuity due

Answer 5

payments occur at BEGINNING of periods, which means the PV of each payment is larger (bc each payment is discounted back one year less, aka the FV is larger bc each payment is compounded for an extra year).

Question 6

perpetuity

Answer 6

annuity with an infinite number of payments, so its value = PMT/interest rate