Module 18 Vocab

Question 1

A contract providing for regular payments of predictable amounts. Regular payments are those that occur at a constant periodic rate, such as monthly, quarterly, or annually.

Answer 1

annuity

Question 2

A measure of where the money is going.

Answer 2

cash flow

Question 3

Interest earned on the original investment amount

and on previously earned interest.

Answer 3

compound interest

Question 4

1) Money to be received at some point in the future is worth less than money available now. 2) Conversion of benefits received in the future (e.g., periodic
incomes, cash flows, reversion) to present value.

Answer 4

discounting

Question 5

The net gain (or loss) of an investment over a specified time period, expressed as a percentage of the investment’s initial cost.

Answer 5

rate of return

the investor’s expected return consists of two components:

• Return of capital
• return on capital

Question 6

Interest in each period calculated based on the original

deposit or investment. The interest does not compound.

Answer 6

simple interest

Question 7

The compound interest factor that indicates the amount to which $1 (or other unit of currency) per period will
grow with compound interest at a specified rate for a specified number of periods

Answer 7

sinking fund factor (aka amount of one per period or future value of one per period)

Ex: What amount must be deposited annually in an investment earning 6% so that you will have $25,000 in 10 years?

Question 8

The concept underlying compound interest that holds
that $1 (or another unit of currency) received today is worth more than $1 (or another unit of currency) received in the future due to opportunity cost, inflation, and the certainty of payment.

Answer 8

Time Value of Money (TVM)

Question 9

The interest rate that includes the effect of compounding

Answer 9

effective rate

Question 10

the interest rate applied to the investment from period to period

Answer 10

periodic rate

Question 11

the periodic interest rate multiplied by the number of periods in a year

Answer 11

annual nominal rate

Question 12

The capitalization rate for debt; the ratio of the annual debt service to the principal amount of the mortgage
loan.

Answer 12

Mortgage cap rate (Rm) / Mortgage Constant

The Mortgage Cap Rate is equivalent to the periodic (monthly, quarterly, annually) mortgage constant times the number of payments per year on a given loan on the day the loan is initiated.

Appraisers use the mortgage constant (or mortgage capitalization rate) in valuation techniques involving income-producing properties. To calculate the
mortgage constant, the annual debt service (that is, the principal and interest for one year) is divided by the mortgage amount.

Example. In Part 14, no. 5 in 14.2 Problem, Jeter had annual debt service of $10,800 based on a mortgage of $150,000. In that problem, the mortgage constant is 7.2%. This rate is different from the stated interest
rate for the mortgage (which is about 6% for Jeter’s loan) because it includes the interest and a portion of the principal

Question 13

What will this investment be worth at a future specified time?

Answer 13

Future value of $1

Question 14

What will this income stream be worth at a specified future time?

Answer 14

Future value of $1 per period

Question 15

How much money should I regularly set aside to cover repairs and improvements to my property?

Answer 15

Payment of $1 period to a sinking fund

Question 16

What is the present value of this income stream?

Answer 16

Present value of $1 per period

Question 17

What will be my annual debt service on a loan for a specified amount, interest rate, and duration?

Answer 17

Payment to amortize $1

Question 18

This investment will be worth a specified amount at a future date, but what is the value right now?

Answer 18

present value of $1