Present Values and Annuities

Question 1

Six separate types of the present value concepts

Answer 1

1. Present value of $1
2. Future value of $1
3. Present value of an ordinary annuity
4. Future value of an ordinary annuity
5. Present value of an annuity due
6. Future value of an annuity due

Question 2

Annuities

Answer 2

Transactions that involve multiple payments or receipts of identical payments in regular intervals

Question 3

Ordinary annuity

Answer 3

Payments are made at the end of each period

Annuity in arrears

Question 4

Annuity due

Answer 4

Payments/receipts occur at beginning of each period

Annuity in advance

Question 5

Calculating present value of ordinary annuity

Answer 5

Number of payments = number of interest periods

Question 6

Calculation present value of annuity due

Answer 6

Number of interest periods = number of payments - 1

Question 7

Present value of $1

US savings bond

Answer 7

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

i.e. capital lease buyout (@end of lease) and bond principal payoff @ end of term

Question 8

Future value of $1

Bank savings account

Answer 8

The amount that would accumulate at a future point in time if $1 were invested now

Question 9

Present value of an ordinary annuity

Winning the lottery

Answer 9

Current worth of a series of identical periodic payments to be made in the future

i.e. periodic lease payments and periodic bond payments

Question 10

Future value of an ordinary annuity

Investing in an IRA

Answer 10

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

Question 11

Present value and future value of annuity due

Answer 11

Similar to present and future value of an ordinary annuity except add 1.00 to the present value of an ordinary annuity

Question 12

Present value formula

Answer 12

Present value = Future amount x Present value factor