PV and Annuities

Question 1

Types

Answer 1

1) PV/Future value of $1 -> single limp sum
2) PV/FV of an ordinary annuity (pay at the end of the year)
3) PV/FV of an annuity due (first payment begins right away*)

(2)/(3)-> annuities or series

Question 2

PV

Answer 2

Based on the time value of money

Question 3

annuity

Answer 3

large number of business transactions involving multiple payments or receipts

bond interest and rental payment

Question 4

Ordinary Annuity- start later (a year from now)-> in arrears*

Answer 4

Number of payments = number of interest periods

Question 5

Annuity Due- starts now

Answer 5

beginning of period

number of interest payments = number of payments - 1

Question 6

ordinary

Answer 6

annuity due payments-1

Question 7

PV of $1

US Savings bond if you were to receive a savings bond that said $25 then the PV of that $25 is different

Answer 7

• capital lease buyout (end of lease)

- bond principle payoff at term end

Question 8

FV of $1

savings account

Answer 8

you put a dollar in to what will it grow too -> greater than 1

Question 9

PV ordinary annuity

winning the lottery

Answer 9

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

periodic lease payments
periodic bond payments

Question 10

FV of an annuity

IRA

Answer 10

sum to be received at some point in the future, of identical payments made from now to that future point

Question 11

PV and FV of annuity due

Answer 11

difference is only in timing of first payment

Question 12

Example*

Answer 12

PV of an ordinary annuity of 1 for 2 periods is 1.833

PV of an annuity due of 1 for 3 periods (ordinary + 1) = (1.833+1)

add both number of payments and the factor

Question 13

HINT

Answer 13

Annuity due is due now

what do I want ultimately in terms of payments

the first payment is simply that amount + rem periods annuity