Chapter 5 - discounted cash flow valuation

Question 1

annuity

Answer 1

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

Question 2

annuity due

Answer 2

an annuity for which the cash flows occur at the beginning of the period

• almost any type of arrangement in which we have to prepay the same amount each period is any annuity due

Question 3

perpetuity

Answer 3

an annuity in which the cash flows continue forever

Question 4

consols

Answer 4

a type of perpetuity

• perpetuity Pv = C / r

Question 5

quoted interest rate

Answer 5

the interest rate expressed in terms of the interest payment made each period

• stated interest rate

Question 6

effective annual rate (EAR)

Answer 6

the interest rate expressed as if it were compounded once per year

Question 7

annual percentage rate (APR)

Answer 7

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

Question 8

pure discount loans

Answer 8

simplest form of loan
- the borrower receives money today and repays a single lump sum at some time in the future

Question 9

interest-only loans

Answer 9

repayment plan the calls for the borrower to pay interest each period and to repay the entire principal (the original loan amount) at some point in the future

Question 10

amortized loans

Answer 10

the lender may require the borrower to repay parts of the loan amount over time

Question 11

ordinary annuity

Answer 11

a series of constant cash flows that arrive or are paid at the end of each period