Unit 4 Exam- Investments

Question 1

What is the statement you must include for every perpetuity question?

Answer 1

For a perpetuity, periodic payment= interest paid.

Question 2

What are the perpetuity formulas?

Answer 2

d=ixP
P=d/i
i=d/P

(i=interest, d= payment, P=principal)

Question 3

On the formula sheet, which annuity formula is the future value and which is the present value?

Answer 3

• The left is the future value, which has a positive n power.
• The right is the present value and it has a negative n.

Question 4

What are the characteristics of the future value formula and other things it can be used for?

Answer 4

• This is for an annuity when you’re trying to find the amount in the future after investing.
• This is more for a deposit annuity.
• This is only used if you know it is an annuity, otherwise the future value can be a compound interest formula.
• If there is a lump sum in front that is compounding, you have to put the compound interest formula in front.

Question 5

What are the characteristics of the present value formula and other things it can be used for?

Answer 5

• This is used to find my money right now.
• This is a withdrawal annuity.
• This usually involves loans.
• This formula is the same as a reducing balance non-recursion formula.

Question 6

Explain the recurrence relations for reducing balance loans and annuities.

Answer 6

They are the same formula, however, the reducing balance loan subtracts regular payments whereas the annuity adds them on. Use these formulas instead of the future and present values when they want specific numbers from specific payments.

Question 7

What must you do when using calculator recursion?

Answer 7

You must always state that you are going to use it.

To do calculation recursion, you just do the first payment, then insert different values into the calculator’s formula.

Question 8

When do you want a high interest rate or a low one?

Answer 8

When you make an investment, you want high. When you are paying a loan, you want low.

Question 9

What is something to remember when doing recursion relations?

Answer 9

Always write the principle on the SAME LINE as the recursion formula.

An+1= 1.003An+80 where A0=12000

Question 10

What is r?

Answer 10

r= 1+i.

Question 11

How do you use logarithms to find an unknown power?

Answer 11

• There should be a number on each side of the = sign; one having the power
  -Put a log in front of both sides.
• You are now able to move the power value to the front of whatever it was to the power of.
• Now as the power is being multiplied, you can move the number to the other side of the = sign through division.

Question 12

How do you find the total interest for a non-recursion?

Answer 12

Remember: for your final value, a fraction of it will be from the payments x number of payments, and the other portion will be from the interest adding up.

First, you find the money paid without the inclusion of interest. This is n x payment amount.

Then, subtract this from the total value.

Question 13

For every time span for payments, what would the n be?

Answer 13

p.a.=1
6 months = 2
monthly = 12
weekly = 52
fortnightly = 26

Question 14

How do I know an investment will be a perpetuity?

Answer 14

-If the investment is an annuity but they don’t want the original investment to decrease.
-If it talks about something that’ll forever supply money.
-If it talks about the annuity being the same as the interest.

Question 15

What is effective rate and what is it used for?

Answer 15

Effective rate converts interest into its annual percentage so you can compare loans.