Time Value of Money Tools

Question 1

Define the “present value” of an ordinary annuity.

Answer 1

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 2

Define “present value” of $1.

Answer 2

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.

Question 3

Distinguish between an “ ordinary annuity (also called an annuity in arrears)” and an “annuity due (also called an annuity in advance)”.

Answer 3

Ordinary annuity: Series of equal amounts received or paid at the end of each equal period.
Annuity due: Series of equal amounts received or paid at the beginning of each equal period.

Question 4

Define the “future value” of an annuity.

Answer 4

Value at some future date of a series of equal amounts to be invested at the beginning of equal intervals over some period of time.
Amount that will accumulate as a result of the amounts invested at the beginning of each period and the compounding of interest on those amounts.

Question 5

Define the “future value” of $1.

Answer 5

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 6

Define “future value” of an ordinary annuity.

Answer 6

Value at some future date of a series of equal amounts to be invested at the end of equal intervals over some period of time.
Amount that will accumulate as a result of the amounts invested at the end of each period and the compounding of interest on those amounts.