Mod 6

Question 1

Annual Percentage Rate

Answer 1

A nominal simple interest rate that banks are required by law to state on loans

Question 2

Annual Percentage Yield

Answer 2

A nominal interest rate that reflects all the compound interest paid or earned in one year

Question 3

Basis Point

Answer 3

A unit that is equal to 1/100 of 1%

0.0001 or .01%

Question 4

Certificate of Deposit

Answer 4

A savings certificate issued by a bank entitling the holder to receive interest for a specified term

Question 5

Compound Interest

Answer 5

Interest earned on both the initial principal and the reinvested interest earned in prior periods

Question 6

Consistent

Answer 6

Periodic rate and # of periods are both defined over the same unit of time (TVM calculations)

Question 7

Continuously Compounded Interest

Answer 7

Interest paid constantly, and immediately begins earning interest on itself

Question 8

Decimal Form

Answer 8

Interest rate expressed as a % must be converted into decimal form when using mathematical formulas or excel spreadsheets for TVM calculations

Question 9

Discounting

Answer 9

Determining the present value of an expected future cash flow using the discount rate

Question 10

Effective Rate

Answer 10

A low frequency rate that is equivalent to a high frequency rate

Example: 1% monthly = 12% annually

Question 11

Future Value

Answer 11

Value of a cash flow that occurs later than the present value

Question 12

Inflation

Answer 12

General increase in prices and a fall in the purchasing power of money

Question 13

Interest on Interest

Answer 13

Interest earned on prior interest payments becoming principal

Question 14

Internal Rate of Return

Answer 14

Discount rate used in capital budgeting that makes the NPV of all cash flows from an investment equal 0

Rate of return you expect to receive if you put your money into a project

Question 15

IRR Rule

Answer 15

Accept projects when IRR is greater than opportunity costs

Reject if IRR is less than opportunity costs

Question 16

Lump Sum

Answer 16

A single amount of money at a certain time

Question 17

Net Present Value

Answer 17

Difference between the present value of cash inflows and the present value of cash outflows

Question 18

Net Present Value Rule

Answer 18

Accept all investments that are positive NPV because they create value

Reject all investments that are negative NPV because they destroy value

Question 19

Nominal Interest Rate

Answer 19

% change in dollars per period

Desired rate of return + adjustment for inflation

Question 20

Number of Periods

Answer 20

Number of periods between two lump sums

Question 21

Percentage Form

Answer 21

Used to input interest rates when solving TVM calculations with a financial calculator

Question 22

Periodic Rate

Answer 22

Interest rate defined in a contract that specifically states how much interest is earned or paid over an interval of time

Question 23

Present Value

Answer 23

Value of a cash flow that occurs earlier than the future value

Question 24

Real Interest Rate

Answer 24

% change in purchasing power for a given period

Approximately the nominal interest rate - inflation rate

Question 25

Simple Interest

Answer 25

Interest an investment earns on original principal only

Question 26

Treasury Bill

Answer 26

Short term debt obligation issued and backed by US government with a maturity of less than 1 year