Topic 3- Time Value of Money II

Question 1

What is APR?

Answer 1

Annual Percentage rate

- the annualized rate the bank advertised

Question 2

What is EAR?

Answer 2

effective annual rate

annual growth rate taking into account compounding

Question 3

Which is more effective APR or EAR?

Answer 3

ear

- gives more accurate figures

Question 4

Perpetuity is ___

Answer 4

infite (series of same amount payments at regular intervals)

Question 5

Ordinary Perpetuity

Answer 5

• equally spaced same amount payments forever

Question 6

Growing perpetuity

Answer 6

equally spaced series of CF that grow at a constant rate g for infinity

Question 7

What’s special about the perpetuity formulas?

Answer 7

the CF is one period from the present so go back one year

Question 8

Ordinary Annuity

Answer 8

series of equally spaced CF over a certain period of time

at end of period!

Question 9

Annuity Due

Answer 9

occurs at the start of the period/due now

equally spaced same amount CF over a period t

Question 10

3 loan types

Answer 10

1. pure discount
2. interest only
3. amortized loan

Question 11

pure discount loan is __

Answer 11

receive $ today
repay lump sum at t
PV simple formula

Question 12

interest only loan ___

Answer 12

int paid periodically
principal paid at maturity
same CF stream as bond (same as bond formula but r=YTM)

Question 13

amortised loan

Answer 13

equal payments with part interest part principal;

Question 14

is an amortisation schedule how do you work out interest?

Answer 14

Beginning balance x interest rate (just simple decimal)