Ch 5

Question 0

Present value of multiple cash flows?

Answer 0

Discount each FV of each cash flow

1/(1+r)^t + 1/(1 + r)^(t +n)

Question 1

Future value of multiple cash flows

Answer 1

Multiple payments earning interest over the years

Ex. Receive $100 over 4 years, in account earning 8% int.
100.  Yr. 4
\+
100 X 1.08.  Yr. 3
\+
100 X 1.08^2. Yr. 2
\+
100 X 1.08^3. Yr. 1

Question 2

Receive $100 over 4 years, in account earning 8% int. How to calculate?

Answer 2

100.  Yr. 4
\+
100 X 1.08.  Yr. 3
\+
100 X 1.08^2. Yr. 2
\+
100 X 1.08^3. Yr. 1

Question 3

What is the amount of cash you need to invest at a 9% rate of return to get $1000 in 1 year and $2000 in 2 years?

Answer 3

1/(1.09) x 1000
+
1/(1.09)^2 X 2000
= $2,600.79

Question 4

Annuity

Answer 4

Level stream of cash flows from fixed period of time

Question 5

Annuity present value equation?, abbreviation?

Answer 5

Annuity present value = C x ((1-present value factor)/r)
= C x {1 - [1/(1 + r)^t]/r}

Where C = annuity payment
r = rate of return
t = # of periods

PVIFA(r,t)

Question 6

Annuity present value factor equation?
Ex. Where interest rate is 10% and period is 3 years?

What’s the present value of a $500 annuity?

Answer 6

Annuity present value factor = (1-present value factor)/r
= (1 - (1/1.1^3))/.10 = 2.48685

Annuity present value = 500 X 2.48685 = $1,243.43

Question 7

Annuity future value factor equation?

Answer 7

Annuity FV factor = (Future value factor - 1)/r

= [(1 + r)^t - 1]/r

Question 8

What is the future value of a 30-yr. $2,000 annuity paying 8 percent interest?

Answer 8

Annuity value factor = (1.08^30 -1)/.08 = 113.2832

Annuity future value = $2,000 X 113.2832 = $226,566.42

Question 9

Annuity due, ex.?

Answer 9

Annuity for which the cash flows occur at the
beginning of the period, prepaying

Ex. A lease, where rent is prepaid

Question 10

Annuity due value equation?

Answer 10

Annuity due value = Ordinary annuity value X (1 + r)

Question 11

Perpetuity AKA Consol?

Answer 11

An annuity where cashflows continue forever

Question 12

PV for perpetuity equation?

Answer 12

PV for a perpetuity = C/r

Question 13

Stated interest rate AKA Quoted interest rate?

Answer 13

Interest rate expressed in terms of interest payment

Made each period

Question 14

Effective annual rate (EAR)?

Answer 14

Interest rate expressed as if it were compounded once

Per year

Question 15

What is the effective annual rate (EAR) of 15.5% compounded quarterly and 15 % compounded daily? Calculate

Answer 15

.155/4 = 0.03875 , $1 X 1.03875^4 = $1.1642

.15/365= .000411, $1 X 1.000411^365 = $1.1618

Question 16

Equation for Effective annual rate (EAR)?

What is EAR for 12% monthly?

Answer 16

EAR = [(1 + Quoted rate/m)^m] - 1

EAR = (1 + .12/12)^12 - 1= 12.6825%

Question 17

Annual percentage rate (APR)

Answer 17

Interest rate charged per period multiplied by number of

Periods per year

Question 18

EAR on an interest rate of 18 percent APR with monthly payments? Calculate

Answer 18

EAR = (1 + .18/12)^12 - 1

= 1.015^12 - 1 = 19.56%

Question 19

3 major types of loans?

Answer 19

Pure discount loans,
interest-only loans
Amortized loans

Question 20

Pure discount loans

Answer 20

Borrow receives present value of money and

Pays lump sum in the future

Question 21

Interest only bonds

Answer 21

Loan has repayment plan where borrower pays interest
Each period and eventually repays entire principal

Form of most corporate bonds

Question 22

Amortizing loan

Answer 22

Process of paying off loan by making regular principal

Reductions called amortizing