LO 4.1.6: Calculate a level of periodic payment (PMT) for a situation.

Question 1

What types of payments (PMT) can we solve for

Answer 1

• 1) A fixed, or equal payment, and

* 2) A serial payment

Question 2

Fixed (equal) payments

Answer 2

Unchanging over the entire time period

Question 3

Serial payments

Answer 3

Commonly mean payments increase each year by the amount of inflation (to maintain constant or real dollar amount)

Question 4

How do serial payments relate to each other (first vs. respective equal vs. last)

Answer 4

• The initial serial payment is less than its respective equal or fixed payments (either an ordinary annuity [end] or annuity due [beg] payment)
• The last serial payment will be greater than the last respective fixed annuity payment, but will have the same purchasing power as the first serial payment.

Question 5

What calculator setting are loan amortizations done with

Answer 5

Loan amortizations (e.g., mortgages, auto loans) are calculated using END mode because the interest on the principal balance is accruing from payment to payment on the balance of the debt. (144)