Time Value of Money

Question 1

Effective Rate

Answer 1

an annualized rate that considers the frequency by which interest is
compounded within a year

Question 2

Nominal Rate

Answer 2

a stated or reported rate that does not consider compounding
within the annual period; rate of interest that has not been adjusted
for the impact of inflation

Question 3

What is the effective rate of 12% compounded quarterly?

Answer 3

12.55%

Question 4

What is the effective rate of 12% compounded monthly?

Answer 4

12.68%

Question 5

What is the effective rate of 12% compounded daily?

Answer 5

12.75%

Question 6

Internal Rate of Return defined

Answer 6

also called the effective interest rate; IRR is a dollar-weighted return; IRR is the discount rate at which the net present value of all cash flows equals zero

Question 7

Annuity due

Answer 7

a finite series of periodic cash flows in which the cash flow (incoming or outgoing) occurs immediately