BUS-F 370 Module 2: Time Value of Money

In solving time value of money problems, a computer ______________ is an alternative to using a financial calculator.

spreadsheet

future value=

FV(rate,nper,pmt,PV)

present value=

PV(rate,nper,pmt,FV)

The spreadsheet functions for time value of money interpret cash inflows as ________________ values and cash outflows as negative values.

positive

What is an example of an annuity?

Home mortgage

Any sequence of equally spaced, level cash flows is called an ____________.

annuity

If a payment stream lasts forever as an equally spaced level cash flow, it is called a _____________.

perpetuity

cash payment from a perpetuity =

Interest rate x present value

Present value of a perpetuity =

cash payment/interest rate

The perpetuity formula tells us the value of a regular stream of payments _____________

starting one period from now.

The_____________ is the present value of an annuity of $1 per period.

annuity factor

Present value of t-year annuity =

payment x annuity factor

An _____________ loan means that part of the monthly payment is used to pay interest on the loan and part is used to reduce the amount of the loan.

amortizing

T/F: In an amortizing loan, as the loan is progressively paid off, the fraction of each payment devoted to interest steadily decreases over time, while the fraction used to reduce the loan steadily increases.

True

A level stream of payments starting immediately is known as an ___________.

annuity due.

Present value of annuity due =

present value of ordinary annuity x (1+r)

An _____________ is an interest rate that is annualized using compound interest.

effective annual interest rate

An overall general rise in prices is known as ______________.

inflation

_____________ refer to the actual number of dollars of the day; constant or real dollars refer to the amount of purchasing power.

Nominal dollars

Real Interest Rate=

Nominal interest rate- inflation rate

T/F: current dollar cash flows must be discounted by the nominal interest rate; real cash flows must be discounted by the real interest rate.

True

The interest rate on the financial calculator is expressed as a ______________.

percentage

If interest rates go down, the present value of a perpetuity will ____________.

increase

The present value of an annuity of $1 per period is called the _______________.

annuity factor.

An ordinary annuity is a series of payments that begin at __________________.

the end of one payment period

The present value of an annuity due is equal to the _____________________.

present value of an ordinary annuity x (1+r)

t/f: Cash flows for annuities due always come one period earlier than the corresponding cash flows for ordinary annuities.

True

The annual percentage rate (APR) on a loan or investment is properly defined as _______________________.

the annually compounded rate of interest

What type of interest rate is generally quoted for loans by banks and other financial institutions?

nominal

You can use the ________ function in excel to solve an annuity problem.

annuity

An ___________ is a level stream of cash flows at regular intervals with a finite maturity

annuity

When does the payment occur in a regular annuity?

the end of the year

A mortage payment is an ______________.

annuity

Where on our timeline is the PVx of an annuity valued?

one tick mark before the first payment is made

A ____________ is a stream of level cash payments that never ends

perpetuity

PV of Perpetuity

cash payment/interest rate

Present Value of Annuity Due=

PV Annuity x (1+r)

Future Value of Annuity Due=

FV Annuity x (1+r)

An ________________ is an interest rate that is annualized using compound interest

effective annual interest rate

An ___________ is an interest rate that is annualized using simple interest

annual percentage rate

Annual Percentage Rate (APR) =

Monthly rate x 12

Effective Annual Interest Rate (EAR)=

((1+ monthly rate)*12)-1

What Excel command can you use to find the effective annual interest rate (EAR) when you know the nominal rate (APR) and the number of periods?

=EFFECT

____________ is the rate at which prices as a whole are increasing

inflation

_______________ is the rate at which money invested grows.

Nominal Interest Rate

__________ is the rate at which the purchasing power of an investment increases

real interest rate

Current (nominal) dollar cash flows must be discounted by the ______________.

nominal interest rate

Real cash flows must be discounted by the _________________.

real interest rate

Real Value (purchasing Power)=

FV/(1+inflation rate)