Chapter 6

Question 1

cash flows over time

Answer 1

value of multiple cash flows

Question 2

PV of multiple cash flows

Answer 2

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Question 3

annuity

Answer 3

a series of equally spaced and level cash flows extending over a finite number of periods

Question 4

annuity due

Answer 4

• payments that are due at the BEGINNING of a payment period
• or payments made in advance (such as rent, insurance etc.)

Question 5

ordinary annuity

Answer 5

payments are made at the END of each payment period (end of the year, month, etc)

Question 6

P/Y

Answer 6

= payment interval (payments per year)
- for example: payments made at the end of every month (so P/Y would be 12)

Question 7

C/Y

Answer 7

= compounding frequency (compounding periods per yer)
- for example: payments made at the end of every month for 5 years compounded monthly so, 5 x 12 = 60

Question 8

perpetuity

Answer 8

series of equally spaced and level cash flows that continues forever

Question 9

PV of an annuity

Answer 9

• present value of cash flows from an annuity discounted at the appropriate rate
• to calculate PV of an annuity due, switch the calculator to the BEG mode

Question 10

amortization

Answer 10

the way in which the principal (the amount borrowed) is repaid over the life of a loan

Question 11

FV of an annuity

Answer 11

the value of an annuity at some point in the future

Question 12

basics od perpetuities

Answer 12

• a perpetuity is a security that pays for an infinite amount of time.
• in finance perpetuity is a constant stream of identical cash flows with no end

Question 13

preferred stock dividends

Answer 13

a preferred dividend is a dividend that is allocated to and paid on a company’s preferred shares

Question 14

EAR (effective annual interest rate)

Answer 14

the annual interest rate that reflects compounding within a year