Financial Background Definitions

Question 1

Credit:

Answer 1

Money coming into an account

• Always a positive value
• Source is immaterial

Question 2

Debit

Answer 2

Money leaving an account

• Always a negative value
• Destination is immaterial

Question 3

Annuity

Answer 3

An account which has a constant interest rate and into which periodic, equal payments are made toward a goal:

Savings

• Retirement
• Special Purchase

Payback a loan
-Mortgage, Auto loan, etc.

Question 4

Interest

Answer 4

APR (Annual Percentage Rate)

ERI (Effective Rate of Interest)
-Simple vs. Compound

Question 5

Simple vs. Compound Interest

$10,000 Savings Account @ 12% a year

Answer 5

Simple
$10,000 x .12
-$1200.00
Total at years end:
-$11,200

Compounded Monthly
12%/12 = 1% per month
$10,000 x .01
-$100.00
$10,100 x .01
-$101.00
$10,201 x .01
-$102.01
$10,303.01 x .01 …etc. 
Total at year’s end
-$11,268.25

Question 6

Interest for Payment Period

Answer 6

i (in Excel “Rate”)
APR/number of payments per year

e. g., 12% APR; monthly payments
- =12%/12
- —i = 1%

Question 7

Present Value of Money (Pv)

Answer 7

What a future amount of money is worth now…

• No time interval
• No lost opportunity
• No risk
• No inflation

Question 8

Future Value of Money

Answer 8

The value of money at some point in the future based upon periodic, constant payments and a constant interest rate

Question 9

Future Value of Money

Answer 9

THERE IS NO COMPONENT OF INFLATION CONSIDERED IN FUTURE VALUE!

Question 10

Fv Example

Answer 10

Savings Account

• $100 Initial Deposit (Pv)
• $100 Credit Per month (Payment)
• —Beginning of period
• 3% APR
• 30 years

Fv=$58,665.06

Question 11

Payments over Time (Annuity)

Answer 11

Payment

• Principal reduction
• Interest

Value of Payment
Depends upon:
-Term of annuity
-Percent of interest
-Frequency of compounding
-Timing of payment

Question 12

Term of Annuity

Answer 12

Usually expressed in years

• Number of payments depends upon schedule
  
  • Monthly payments (12 per year)
  • Total number of payments = 12 times term in years
    
    • n (In Excel “Nper”)
  • Quarterly payments (4 per year)
    
    • n = 4 X term in years

Question 13

Period of an Annuity

Answer 13

Interval of payments

• Monthly
• Quarterly
• Weekly
• Semi-annually
• Annually
• Bi-annually
• Etc.

Question 14

Timing of payments

Answer 14

Beginning of period

LOAN:
-Reduces principle before interest for period is computed

SAVINGS:
-Increases principle before interest is computed

End of period

LOAN:
-Computes interest before principle is reduced by payment

SAVINGS:
-Computes interest before increase in principle

Question 15

Payment Timing:

Beginning vs. End

Answer 15

Loan values

• $30,000
• 5 Year Term
• 5% APR

Question 16

Loan repayment

Answer 16

See graph

Question 17

Wholesale Cost

Answer 17

The amount a retailer pays the supplier for an item to be sold .

-This Cost is less than the Retail Price

Question 18

Markup

Answer 18

The amount a retailer adds to the Wholesale Cost of an item.
This amount is calculated to cover the retailer’s cost of doing business such as:

Rent
Utilities
Supplies
Wages
Transportation
Maintenance
Insurance
Loan Payments
and...

-Markup may very by item

Question 19

Profit

Answer 19

The amount, part of Markup, that is over and above the amount required to cover the costs of doing business.

Question 20

Retail Price

Answer 20

The price for which an item sells in a retail store.

This amount includes:

• The Wholesale cost of the item
• The Markup on the item
  
  • an item costs $1 Wholesale
  • Markup is 25%
  • Retail Price equals $1.25