Chapter 5

Question 1

simple interest

Answer 1

interest is earned only on principal

Question 2

compound interest

Answer 2

interest on interest
- when interest paid on the investment during the first period is added to the principal, then during the second period interest is earned on this new sum

Question 3

future value

Answer 3

the amount to which your investment will grow

Question 4

Future value can be increased by (2)

Answer 4

1. increasing the number of years for which money is invested
2. investing at a higher interest rate

Question 5

Present value

Answer 5

current value of a future payment

Question 6

present value is lower if (2)

Answer 6

1. time period is longer

2. interest rate is higher

Question 7

annuities

Answer 7

series of equal dollar payments for a specified number of years

Question 8

order annuity

Answer 8

payments occur at the end of each period

Question 9

compound annuity

Answer 9

depositing an equal sum of money at the end of each year for a certain number of years and allowing it to grow

Question 10

annuities due

Answer 10

each annuity payment occurs at the beginning of the period rather than at the end of the period

Question 11

amortized loans

Answer 11

a loan that is paid off in equal periodic payments

Question 12

effective annual rate

Answer 12

EAR; an investments annual rate of interest when compounding occurs more often than once a year

Question 13

perpetuity

Answer 13

an annuity that continues forever