Lecture 2 Flashcards
An annuity due has:
a) Cash flow at the end of every period
b) Cash flows that occur at the beginning of each period
c) Is never due in the next year
d) Cash flow that occur both at the beginning and end of every period
b) Cash flows that occur at the beginning of each period.
Time value of money means:
a) Money is everything
b) A pound has more worth tomorrow than a pound today
c) A pound has more worth toady than a pound tomorrow
d) None of the above
c) A pound has more worth today than a pound tomorrow
The process of finding the present value is called __________ while finding the future value is called ___________.
a) Present Value; Future Value
b) Compounding; Discounting
c) Discounting; Compounding
d) Nominal Value; Effective Value
c) Discounting; Compounding
The effective rate of interest will always __________________________ bethe nominal rate.
Equal to or greater than
Simple and Compound Interest
With simple interest, you ____ ____ interest on interest.
With compound interest, a __________ earn interest on interest.
With simple interest, you DON’T EARN interest on interest.
With compound interest, a DEPOSITOR earns interest on interest.
Compounding more Frequently than Annually
What does compounding more frequently result in? and why?
Compounding more frequently than once a year results in a higher effective interest rate because you are earning on interest on interest more frequently.
As a result, the effective interest rate is greater than the nominal (annual) interest rate. Furthermore, the effective rate of interest will increase the more frequently interest is compounded.
What is a Nominal Interest Rate?
Is the stated or contractual rate of interest charged by a lender or promised by a borrower.
What is a Effective Interest Rate?
Is the rate actually paid or earned.
Present Value is the _______ pound value of a ______ amount of money.
Present Value is the CURRENT pound value of a FUTURE amount of money.
The discount rate is often also referred to as the…
The discount rate is often also referred to as the opportunity cost, the discount rate, the required return, and the cost of capital.
What is a Annuity?
Equal annual series of cash flows. They can either be inflows or outflows.
What are the main two types of annuities?
- Ordinary (deferred) annuity
- Annuity Due
An ordinary (deferred) annuity has cash flows that occur at the \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_. An annuity due has cash flows that occur at the \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_.
An ordinary (deferred) annuity has cash flows that occur at the END OF EACH PERIOD. An annuity due has cash flows that occur at the BEGINNING OF EACH PERIOD.
An annuity due will ______ __ _______ than an otherwise equivalent ordinary annuity because interest will compound for an additional period.
An annuity due will ALWAYS BE GREATER than an otherwise equivalent ordinary annuity because interest will compound for an additional period.
A mixed stream of cash flows reflects __ __________ _______.
A mixed stream of cash flows reflects NO PARTICULAR PATTERN.
