Chapter 5 Section 1: Present Value and Annuities

Question 1

What are the six types of present value concepts? What do they mean?

Answer 1

Present value of $1 - one shot
Future value of $1 - one shot
PV of ord annuity (in arrears) - end of year - series of $1
FV of ord annuity (in arrears) - end of year - series of $1
PV of annuity due - beg of year - series of $1
FV of annuity due - beg of year - series of $1

Question 2

What does the present value of $1 tell you?

Answer 2

How much you need to invest now to get a certain amount in the future

Question 3

What does the future value of $1 tell you?

Answer 3

If you invest $1 now, what will you get in the future (compound interest)

Question 4

What does the future value of an ordinary annuity tell you?

Answer 4

The sum to be received at some point in the future of the identical investments made from now until then.

Question 5

How do you get the rate for annuities due?

Answer 5

Just add 1.00 to the rate for the ordinary annuity, because it is for one more period.