Chapter 5 Flashcards

1
Q

Ordinary annuity

A

A level stream of cash flows for a fixed period of time.

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2
Q

Annuity due

A

An annuity for which the cash flows occur at the beginning of the period.

Annuity due Value = Ordinary Annuity Value * (1+R)

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3
Q

Perpetuity

A

An important special case of an annuity arises when the level stream of cash flows continues forever.

Perpetuity PV = C/r – (PV: Present Value, C: Cash Flow, r: Discount rate)

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4
Q

Effective annual rate

A

It is the real return on a savings account or any interest- paying investment when the effects of compounding over time are taken in account. It also reveals the real percentage rate owed in interest on a loan, a credit card or any other debt.

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5
Q

Annual percentage rate

A

The interest rate charged per period multiplied by the number of periods per year.

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6
Q

Interest-only loan

A

A repayment plan that calls for the borrower to pay interest each period and to repay the entire principal at some point in the future. Principal is paid all at once

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7
Q

Amortized loan

A

The lender may require the borrower to repay parts of the loan amount over time. The process of paying off a loan by making principal reductions.

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8
Q

What is a pure discount loan?

A

The borrower receives money today and repays a single lump sum at some time in the future. Principal is paid all at once

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