Unit 4 - TVM Principles part I

Question 2

Define an annuity (In time value of money language)

Answer 2

A series of equal payments made in saving to meet a financial goal

Question 3

Define an annuity due (In time value of money language)

Answer 3

An annuity where payments are made at the beginining of the period (month , quarter, year and so forth)

Question 4

Define an ordinary annuity (In time value of money language)

Answer 4

An Annuity where payments are made at the end of the period (month, quarter, year and so forth)

Question 5

Compunding

Answer 5

The process of interest being earned on increasing sums of principal and interest over time is known as compounding.

Question 6

Discounting

Answer 6

Discounting is the process of determining how much a future sum is worth in terms of its present value

Question 7

TVM Calculations tip

Answer 7

You must at least enter 3 of the 5 main values in TMV to solve for a TVM problem. -PV -FV -PMT -N -I/YR

Question 8

PV (Present Value)

Answer 8

This is usually a negative input on your calculator when you ar solving for a fuutre value, or when a future value is also and entry into the probem. This is only calculator logic - so that the calculator knows it is in present and not future value - and othersie has no financial relavance in deriving the correct answer to the time value of money problme. This will become clear as you work the problem.

Question 9

FV (Future Value)

Answer 9

This is usually a positive input on your calculator.

Question 10

PMT (payment)

Answer 10

This may be either a negative or positive input depending on the nature of the cash flow payment from the perspecitve of the client. If the payment is a cash out-flow, it is entered in the calculator as a negative; if the payment is a cash inclow, it is entered in the calculator as a positive.

Question 11

N (number of periods)

Answer 11

When using the 1 P/YR setting for a calculation with greater than one payment (period) per year, multiply the appropriate factor by the number of years. For example, monthly payments for 10 years is entered as 10x12 = 120N

Question 12

I/YR (interest rate or rate of return)

Answer 12

When using the 1 P/YR setting for a calculation which is greater than one payment (period) per year, divide the annual interest rate by the appropriate number of periods per year. For example, monthly payments with 6% interest compunded montjly is entered as 6/12 = .50 I/YR.

Question 13

Future value of a single sum

Answer 13

Single sum is the PV and compounded at a specific rate for a period of time to obtain the FV

Question 14

Present value of a single sum

Answer 14

The value today of a single sum that will be recievd in the futuer when dicounted for a given number of periods and at a given interest rate.

Question 15

Future sum of an annuity

Answer 15

The accmumulations of funds to meet a future financial goal

Question 16

Fixed Paymnets

Answer 16

Unchanged payments over the entire period of the annuity

Question 17

Serial Payments

Answer 17

Commonly means that the payment increases each year by the amount fo inflation (so as to have a constance or real doola amount)

Question 18

Rule of 72

Answer 18

Shortcut to figure out how long it will take for an invesment to double 72/# of years = Rate of return needed 72/rate of return = number of years for investment to double.