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LOMA 371- ISTAR > Chapter 8 > Flashcards

Chapter 8 Flashcards

1
Q

Define the time value of money

A

concept which states that the value of a sum of money changes over time as a result of the effect of interest.

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2
Q

a sum of money has both a present and future value. define these

A

1) present value (PV) sum of money defined as the amount that, if invested at a specified interest rate on a specified date, would grow to equal a specified future amount
2) future value (FV) a sum of money is the amount that the original sum is expected to be worth at a specified future date, given a specified interest rate.

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3
Q

Present value of an investment of an investment is the principal. Define the principal

A

the original amount invested before it earns interest- and the future value is the invested principal ply the accumulated earnings.

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4
Q

FOR PRINCIPAL SUM:

the present value is >/< than its future value?

A

present value is less than future value

Future value is greater than present value

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5
Q

FOR INTEREST RATE,
an increase in the interest rate will result in a
decrease/increase of present value and decrease/increase of future value

A

Decrease in present value

Increase in future valye

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6
Q

FOR NUMBER PERIODS, compound interest. increase in the number of specified periods will result in a decrease/increase of present value?

A

^ in number of periods = decrease of present value and increase in future value

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7
Q

Interest is compounded, the interest period used in future value calculations are called compounding periods.

A

True

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8
Q

What is the formula for calulating the future values of a single amount for one period

A

FV = PV + interest earned

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9
Q

For one-year period, the amount of interest earned is euqal to the present value multipled by the interest rate (i) .
What is the formula for interest earned on a one-year investment?

A

interest earned = PV x i

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10
Q

What is the equation incorporating the formula for interest into the basic future value formula results?

A

Future value = present value + interest earned

FV= PV / (PV x i) = PV x (1 / i)

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11
Q

Define “exponent”

A

a number that indicates the power to which a base number has been raised.

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12
Q

What is the general formula for finding the future value of an investment earning compound interest, i, for n, periods?

A

FV= PV x (1 + i)^n

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13
Q

Define a future value interest factor (FVIF)?

A

is the future value of $1.00 at a given interest rate for a stated number of periods.

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14
Q

What do you call a table that lists future value interest factors?

A

future value interest factors (FVIF) table.

They’re divided into columns .

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15
Q

What are the 3 important characteristics of all FVIFs?

A

1) values of FVIF are always greater than 1.0
2) at a given interest rate, i, the values of FVIFs increase as the number of compounding periods, n, increases
3) at a given number of compounding periods n, the values of FVIFs increase as the interest rate, i, increases.

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16
Q

What equation do you use to calculate the future valye of a single sum over multiple compounding period using FVIF tables,

A

FV= PV x FVIF(n,i)

17
Q

What is an annuity?

A

any series of equal payments made at regular intervals over a specified time period.

18
Q

What is the future value of an annuity?

A

a given future data is the amount that a series a equal payments earning compoud interest will accumulate by that date.

19
Q

What are 3 important facts to remember when calculating the future value of an annuity?

A

1) an annuity, as used in financial analysis, is nto an annuity contract.
2) an annuity can refer to any series of payments that are equal in amount and paid at regular intervals, whether those payments are received by an insurer or paid out by the insurer
3) annuity does not include a series of uneuqal payments or payments made at irregular interval.

20
Q

An annuity can be classified as an orinary annuity or an annuity due based on the timming of each period payment. What are those?

A

1) ordinary annuity: series of periodic paymeents for which the payment occurs at the end of each specified payment period
2) annuity due is a series of periodic payments for which the payment occurs at the beginning of each specified payment.

21
Q

What is a valuation date of an annuity?

A

the date as of which the value of the annuity is determined.

22
Q

Can interest be earned on all payments of an annuity due?

A

yes, because payments are made at the beginning of each period.

23
Q

what are future value interest factors for an annuity (FVIFAs)?

A

a compound value interest factors that represents the future value for a 1$ annuity at a given rate of interest for a stated number periods (for number of periods).

24
Q

What do you call the table that lists values of FVIFAs for a variety of interest rates and interest compounding periods?

A

a future value interest factors for an annuity (FVIFA) table.

25
Q

What is the general formula for using an FVIFA to determine the future value of an ordinary annuity?

A

FVA= periodic payment x FVIFA(n,i) = PP x FVIFA(n,i)

26
Q

What is another name for finding present values?

A

referred to as discounting,

27
Q

What do you call the interest periods used in present value calculations?

A

discounting periods.

28
Q

What is the general formula for the present value of a single amount for a single period?

A 
PV= FV / (1+i) or 
PV = FV x (1/(1+i))
29
Q

what is the formula for calculating the present value of a single amount for multiple periods

A

PV = FV / (1+i) (single period)

PV= FV x (1/(1+i)^n

30
Q

what is a present value interest factors?

A

(PVIF) the present value of $1.00 discounted at an interest rate of i percent per period for n periods.

31
Q

present value of an amount to be paid at a specified future date?

A

PV= FV x PVIF(n,i)

32
Q

What is a present value interest factors (PVIF) table?

A

values of PVIFs for many possible interest rates and number of periods?

33
Q

What are the 3 characteristics of PVIFs.

A

1) all number in the PVIF table are less than 1, because present value of any amount at interest is < than its future value.
2) at a given interest rate, i, the PVIFs decrease as the number of discounting periods, n, increases.
3) for a given number of discounting periods, n, the PVIFs decreased as the interest rate, i, increases.

34
Q

What is a present value interest factor for an annuity (PVIFA)

A

is the present value of a $1.00 ordinary annuity at a given rate of interest for a stated number of periods.

35
Q

What do you call a table that lists PVIFA values?

A

present value interest factors for an annuity (PVIFA) table.

36
Q

How can you find the present value of an ordinary annuity (PVA)?

A

found by adding together the present value of each individual payment in the series.

PVA = PP x PVIFA(n,i)

37
Q

What is the present value of an annuity due? (PVAd)

A

the amount that must be invested now in order to provide for a specified, equally spaced series of equal future payments made at the beginning of each payment period, given a specified interest rate and a specified number of periods.

** its equal to the present value of a corresponding ordinary annuity of one fewer period plus the amount of one periodic payment.

38
Q

what is the PVAd calculation/equation?

A

PVAd = PP x [PVIFA(n-1,i) + 1]

39
Q

the techniques for calculating the PVA and PVAd apply only to annuities for which what 2 condition applies?

A

1) payment period equals the length of the interest period

2) payment are all equal in amount.

LOMA 371- ISTAR (15 decks)

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