Lecture 7

Question 1

annuity = ?

Answer 1

a series of equal payments that occur a number of time periods

Question 2

ordinary annuity = ?

Answer 2

exists when the equal payments occur at the end of each time period

Question 3

FVA = ?

Answer 3

future value of annuity

Question 4

PMT = ?

Answer 4

periodic payment in equal amounts

Question 5

ordinary annuity equation = ?

Answer 5

FVA = PMT x (((1+r) to the power of n - 1) / r)

Question 6

n = ?

Answer 6

number of periods

Question 7

r = ?

Answer 7

compound interest rate

Question 8

annuity due = ?

Answer 8

exists when equal payments start at the beginning of each time period

Question 9

you want £1000 every year for 3 years at an 8% interest rate

what’s the FVA?

Answer 9

1000 x (((1+0.08) to the power of 3 -1) / 0.08) = 3246.4

Question 10

PVA = ?

Answer 10

present value of annuity

Question 11

what is the equation for present value of annuity?

Answer 11

PVA = PMT x ((1-(1/(1+r) to the power of n) / r)

Question 12

will receive £1000 every year one year from now for 3 years at 8% interest rate

what’s the PVA?

Answer 12

1000 x ((1-(1/(1+0.08) to the power of 3) / 0.08 = 2577.1

Question 13

interest rates cause the FVA to be…

Answer 13

higher than FVA would be expected to be

Question 14

interest rates cause the PVA to be…

Answer 14

smaller than PVA would be expected to be

Question 15

what are the 5 variables for annuity problems?

Answer 15

FV = future value
PV = present value
r = interest rate
n = number of compounding periods
PMT = payment amount

Question 16

basic equation for compounding more than once a year = ?

Answer 16

FV = PV x (1 + r/m) to the power of n*m

Question 17

what is the FV of a 2 year, £1000, 8% interest loan with semi-annual compounding?

Answer 17

FV = 1000 x (1+0.08/2) to the power of 2*2 = 1169.86

Question 18

APR = ?

Answer 18

annual percentage rate

a stated rate determined by multiplying interest rate charged (r)
per period by the number of periods in a year (m)

Question 19

APR equation = ?

Answer 19

r * m

Question 20

what’s the APR on a car loan that charges 1% per month?

Answer 20

1% x 12 = 12% APR

Question 21

how is APR expressed?

Answer 21

as a percentage

Question 22

EAR = ?

Answer 22

effective annual rate

the opportunity cost measure of the interest rate when compounding occurs more frequently than annually

Question 23

EAR equation = ?

Answer 23

(1+r) to the power of m - 1

Question 24

what’s the EAR on a credit card loan with an 18% APR and with monthly payments?

Answer 24

r = 18% / 12 = 0.015

(1+0.015) to the power of 12 - 1 = 19.56%