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CPCU 540 > Chapter 6 > Flashcards

Chapter 6 Flashcards

0
Q

What does the I/YR button on the calculator mean?

A

Interest rate per year

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1
Q

What does the N key on the calculator mean?

A

Number of periods

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2
Q

What does the PV button on the calculator mean?

A

Present value

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3
Q

What does the FV button on the calculator mean?

A

Future value

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4
Q

Calculate FV of a single sum

Ex. 30k lump sum to invest today. Compound annual interest of 6%. What will the FV be in 5 years?

A

[SHIFT] C ALL

$30000 +/- PV (enters the PV. should be negative)

6 I/YR (interest rate)

5 N (number of years)

FV (shows solution) $40,147

Or

FV = PV * (1 + i)^n

Or
PV * FV factor

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5
Q

How is the effective interest calculated?

Nominal interest rate of 6

12 payments per year

A

[SHIFT] DISP 4 (4 decimals)

6 [SHIFT] NOM % (enters nominal rate)

12 [SHIFT] P/YR (sets 12 payments)

SHIFT EFF % (determines effective interest rate)

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6
Q

I want to have $15,000 to buy a boat in 5 years. I want to deposit money in a savings account earning 3% compound interest. How much do I have to deposit today?
(Present value)

A

$15,000 FV
3 I/YR
5 N
PV = $12,939

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7
Q

Phil wants to have $10k in 7 years to buy a jeep. He has $6,000 to deposit today. How much interest is needed?

A 
Clear calculator 
-$6000 PV
$10000 FV
7 N
I/YR
= 7.57
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8
Q

What is an annuity?

A

Constant cash flow amount saved or received

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9
Q

Annuity where payments are received at the end of each period?

A

Ordinary

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10
Q

Future value of annuity calculation:
Phil will deposit $1k, annually, for 4 years. First deposit will be made in one year.

If 5% compound interest, how much will be in account in 4 years?

A

1) Clear calculator
2) [SHIFT] BEG/END (if BEGIN is displayed)

3) 1000 +/- PMT (-$1k as payment)
4) 5 I/YR (int rate)
5) 4 N (4 years)
6) FV (solves $4310)

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11
Q

Present Value of Annuity

Phil will get a $5k ordinary annuity at end of each year for next 10 years. Assuming an interest rate of 5% what is the annuity worth now.

A

1) Make sure doesn’t display BEGIN
2) 5000 PMT
3) 5 I/YR
4) 10 N
5) PV ($38608)

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12
Q

Payment required (Phil needs to have $10,000,000 in 4 years to buy a mansion. He will make 4 annual deposits at the end of the year at 8% annual interest. How much do the deposits need to be?

A

1) Clear
2) make sure not set to BEG
3) 10000000 FV
4) 8 I/YR
5) 4 N
6) PMT (2,219,208)

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13
Q

Annuity in which payments are received at the beginning of each period. (Make sure to set calc to BEGIN mode)

A

Annuity due

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14
Q

Provide an example of an annuity due.

A

Amounts payable under life insurance

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15
Q

How can you concert the PV of an ordinary annuity to an annuity due?

A

Multiply ordinary annuity PV By (1+i)

16
Q

How can you convert the PV of an annuity due to an ordinary annuity.

A

Divide by (1+i)

17
Q

Present value of an annuity. Tom will get $5k at begin of year for 10 yrs. INT 5%. What is PV

A 
Clear
Make sure says BEG
5000 PMT
10 N
5 I/YR
PV (40539)
18
Q

A stream of payments that continues indefinitely. Ex. Dividends on preferred stock or real estate income.

A

Perpetuity

19
Q

How to calculate perpetuity.

A

PV = payment / capitalization rate (int rate)

20
Q

Phil wants to buy a lakefront vacation rental property. It will generate annual income of $12500 per year. Phil wants 14% return. What is current value of property?

A

89286

21
Q

How is the present value of unequal cash flows determined?

If using a calculator which button is used to calculate multiple unequal cash flows?

A

Add the present values of the individual cash flows.

CFj to enter payments and NPV to get the value

22
Q

What is the name for the present value of unequal payments?

A

Net present value

23
Q

What does it mean if the NPV os positive?

A

The investment’s rate of return exceeds the discount rate.

24
Q

Discount rate is 8%. What is the NPV of the following cash flow structure?

Initial: $250
End yr 1: $125
End yr 2: $100
End yr 3: $80

A 
0 CFj
125 CFj
100 CFj
80 CFj
8 I/YR
NPV = 260,351.57
25
Q

If compounding occurs annually, the effective interest rate will be higher than/lower than/the same as the effective interest rate?

A

The same as

CPCU 540 (11 decks)

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