Time value of money

Question 1

Define an “ordinary annuity (also called an annuity in arrears)”.

Answer 1

Series of equal amounts received or paid at the end of each equal period.

Question 2

Define an “annuity due (also called an annuity in advance)”.

Answer 2

Series of equal amounts received or paid at the beginning of each equal period.

Question 3

Define the “future value” of $1.

Answer 3

Value at some future date of a single amount invested now.

Amount that will accumulate as a result of compounding of interest on the single amount invested at the present.

Question 4

Define the “present value” of an ordinary annuity.

Answer 4

Value now of a series of equal amounts to be received at the end of equal intervals over some future period

Equal amounts to be received at the end of a number of equal periods are discounted using an interest rate to get the present value of those amounts.

Question 5

Define the “future value” of an annuity.

Answer 5

Define “future value” of an ordinary annuity.

Question 6

Define the “present value” of $1

Answer 6

Value now (at present) of a single amount to be received in the future.

Amount to be received in the future is discounted using an interest rate to get the present value of that amount.