Valuing Cash Flows

Question 1

What is an annuity due?

Answer 1

An annuity for which the cash flows occur at the beginning of the period.

Question 2

What is the nominal interest rate?

Answer 2

The interest rate expressed in terms of the interest payment made each period.

Question 3

What is the effective annual percentage rate EAR?

Answer 3

THe interest rate expressed as if it were compounded once per year

Question 4

What is the annual percentage rate? APR

Answer 4

The harmonised interest rate that expresses the total cost of borrowing or investing as a percentage interest rate.

Question 5

What is an Amortized loan and what two types are there?

Answer 5

The repayment of loan principle over time

• fixed principal repayment: repay the principal in equal instalments plus all interest due on the outstanding amount
• fixed total payment: the borrower makes a single, fixed payment every year; also includes repayment of principal and also interest