Chapter 2 Applying Time Value Concepts

Question 1

Simple Interest

Answer 1

• Interest on a loan or investment computed as a
percentage of the loan or investment amount, or
principal.
– Interest paid or earned is not reinvested.
– Measured using the principal (P), the interest rate
applied to the principal (r), and the loan’s time to
maturity (t).

Question 2

Annuity

Answer 2

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

Question 3

Discounting

Answer 3

: the process of obtaining present values.

Question 4

Ordinary annuity

Answer 4

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

Question 5

Annuity due

Answer 5

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

Question 6

Timelines

Answer 6

diagrams that show payments received or
paid over time

Question 7

Nominal interest rate

Answer 7

the stated or quoted, rate of
interest.
– Also known as the annual percentage rate (APR)

Question 8

Effective interest rate

Answer 8

the actual rate of interest that
you earn, or pay, over a period of time.
– Also known as the effective yield (EY).
• Allows for the comparison of two or more interest
rates because it reflects the effect of compound
interest.