Lesson 2

Question 1

two basic problems in financial management?

Answer 1

investment
financing

Question 2

earned or incurred for the use of the principal amount over the relevant time period.

Answer 2

Interest

Question 3

If the interest earned or incurred is always based on the original principal, then ______ is assumed.

Answer 3

simple interest

Question 4

The usual assumption in most business transactions is to use

simply earning interest on interest.

simply earning interest on interest. This means that the basis for the computation of the applicable interest for a certain period is not only the original principal, but also any interest earned in the previous period assuming all cash flows would be paid or received in a lump sum upon maturity.

Answer 4

Compound Interest

Question 5

A classic example of business transaction that regularly pays out an equal cash flow stream

Answer 5

Amortizing loan