Chapter 2

Question 1

What is interest?

Answer 1

the rent charged for the use of money

Question 2

What does the I, P, R AND T stand for in the simple interest formula

Answer 2

I = interest 
p = principal or present value 
r = annual interest rate expressed as a decimal or percent 
T= time (in years)

Question 3

What is interest?

Answer 3

the rent charged for the use of money

Question 4

What are the two ways of computing interest?

Answer 4

1) Simple interest

2) Compound interest

Question 5

define the simple interest?

Answer 5

interest on a loan computed as a percentage of the loan amount, or principal

Question 6

state the simple interest formula?

Answer 6

I = P x R x T

Question 7

What is compound interest?

Answer 7

• the process of earning interest on interest

Question 8

Whats the difference between solving simple interest problems and compound interest problems?

Answer 8

for compound interest, the interest each year is added to the original principal

Question 9

time value of money is commonly applied to what two types of cash flows?

Answer 9

1. A single dollar amount (a lump sum)

2. Annuity

Question 10

What is Annuity?

Answer 10

the payment of a series of equal cash flow payments at equal intervals of time

Question 11

What is the formula for future value of a single dollar amount?

Answer 11

FV = PV( 1 + i/N) to the power nt

Question 12

What do the variables in the FV formula stand for

Answer 12

FV- future value of an investment
PV = present value of an investment
i = annual interest rate (as a decimal or percent)
n = number of copmpounding periods per year
t = time (in years)

Question 13

what is the future value interest factor?

Answer 13

A factor multiplied by today’s savings to determine how the savings will accumulate over time

Question 14

what are the two types on annuity?

Answer 14

Ordinary annuity

Annuity due

Question 15

Define the term ordinary annuity

Answer 15

A stream of equal payments that are received, or paid, at intervals in time, at the end of a period

Question 16

what is Annuity due?

Answer 16

A series of equal cash flow payments that occur at the beginning of each period

Question 17

if the payment changes over time, the payment stream still reflects an annuity

Answer 17

False, if payment changes over time, the stream does not reflect an annuity

Question 18

How can the present value of an annuity be obtained?

Answer 18

The present value of an annuity can be obtained by discounting the individual cash flows of the annuity and totalling them

Question 19

What it normal interest rate (also known as the APR)

Answer 19

the stated or quoted, rate of interest

Question 20

when comparing two or more interest rate is the nominal useful

Answer 20

No because it does not take into account the effect of compounding

Question 21

what is the Effective interest rate (also known as effective yield (ey)

Answer 21

• the actual interest rate of interest that you earn, or pay, over a period of time

Question 22

Effective interest rate allows the comparison pf two or more interest rates because it ____?

Answer 22

because it reflects the effect of compound interest