Present Value And Annuities

Question 1

Six types of present value concepts

Answer 1

• present value of $1
• future value of $1
• present value of an ordinary annuity
• future value of an ordinary annuity
• present value of an annuity due
• future value of an annuity due

Question 2

Annuities

Answer 2

Business transactions that involve multiple payments or receipts. Identical periodic payments at regular intervals.
Ex: Bond interest payments and lease rental payments.

Question 3

Ordinary annuity

Answer 3

“In arrears”

Payments made at the end of each period.

Question 4

Annuity due

Answer 4

“Annuity in advance”

Payments/receipts occur at the beginning of each period.

Question 5

Present Value of $1

Answer 5

The amount that must be invested now at a specific interest rate so that $1 can be paid or received in the future.

• capital lease buyout (end of lease)
• bond principal payoff (end of term)
• US savings bond

Question 6

Future Value of $1

Answer 6

Compound interest. The amount that would accumulate at a future point in time if $1 were invested now. The interest factor causes the future Value of $1 to be greater than $1.
- bank savings account

Question 7

Present Value of an Ordinary Annuity

Answer 7

The current worth of a series of identical periodic payments to be made in the future.

• periodic lease payments
• periodic bond payments
• winning the lottery

Question 8

Future Value of an Ordinary Annuity

Answer 8

The sum, to be received at some point in the future, of identical periodic investments made from the present until that future point.
- investing in an IRA

Question 9

Present Value and Future Value of Annuity Due

Answer 9

By adding 1 to the PV of an Ordinary Annuity of 1 for n periods, the present Value of annuity due of 1 for n+1 periods may be found.
Beginning of period payments.