Chapter 6

Question 1

What is financial math?

Answer 1

study of how money changes over time e.g. saving, investing, loan repayment

Question 2

What is cash flow

Answer 2

The development of saved money (fv) over time e.g. regular savings, payments

Question 3

What is Pt

Answer 3

amount of money P available at time t

Question 4

What is It?

Answer 4

amount of interest I that exists at time t

Question 5

What is i?

Answer 5

interest rate

Question 6

What is q?

Answer 6

interest factor
q=1+r

Question 7

What is n?

Answer 7

periods in total

Question 8

what is interest

Answer 8

price paid for capital investment or capital transfer or price to keep certain amount of money at a bank

Question 9

What is simple interest?

Answer 9

interest paid for the transfer of initial amount.
interest accrued at the end of period in not compounded= only initial amount has interest
Interest= Principal * Rate* Time
I+ Prn

Question 10

What is compound interest?

Answer 10

also called exponential interest
interest paid for transfer of initial amount and interest due at the end of
each period

Question 11

What is mixed interest?

Answer 11

combo of simple and compound interest

Question 12

What is nominal interest?

Answer 12

annual interest rate not accounting for compounding, which is broken down into smaller periods (monthly,quarterly)

Question 13

What is effective annual interest rate?

Answer 13

the actual interest earned or paid in a year, including compounding

Question 14

what is continuous rate?

Answer 14

interest that is compounded continuously over time, as interest periods are short.

Question 15

What is equivalence principle

Answer 15

money at different times can be made equal using interest.

Question 16

What is price calculation used in business for?

Answer 16

to understand securities markets

Question 17

What is annuity calculation?

Answer 17

deals with the development of savings assets with regular payments.
payments are called annuities

Question 18

What is PMT?

Answer 18

(constant) annuity rate or installment

Question 19

What is the annuity calculation called if the installment is due at the beginning of period?

Answer 19

annuity in advance

Question 20

What is the annuity calculation called if the installment is due at the end of period?

Answer 20

deferred annuity

Question 21

What is FVn?

Answer 21

final annuity value

Question 22

What is amortization

Answer 22

repayment of debt in installments

Question 23

What is the payment called that the debtor has to come up with monthly/ annualy

Answer 23

annuity

Question 24

What does annuity in amortization consist of?

Answer 24

repayment installment- the part that pays loan itself
interest- part you pay lender for borrowing money

Question 25

What is residual debt?

Answer 25

amount left to pay at any given time

Question 26

What are the two types of ways to pay amortization?

Answer 26

installment debt- pay back higher amount of loan, residual debt & interest payable get smaller over time pros: pay less overall, save money in the long run cons: higher payments in the beginning annuity payment- pay same total amount every time, first payment goes to interest than the actual loan pros: easier on the budget cons: pay higher interest overall

Question 27

What type of amortization is common?

Answer 27

annuity payment it is offered as an alternative to a one-time residual amount to be paid at the end of term, especially on mortgage loan

Question 28

What is one time residual amount

Answer 28

-large final payment at end of loan term after making smaller regular payments -the remaining unpaid loan balance

Question 29

What is financial processes?

Answer 29

the ways money moves or changes over time e.g. spending, saving, interest earned

Question 30

What is an annuity?

Answer 30

Sequence of equal payments at equal amount of time

Question 31

How to calculate term of loan in installment debt in amortization ?

Answer 31

T= P0/n Term= Principal Loan/ Credit Period

Question 32

How do you calculate future value of annuity?

Answer 32

FVn=PMT * (q^n-1)/ r

Question 33

How do calculate the installment rate in annuity?

Answer 33

PMT=FVn*r/q^n-1

Question 34

What is r?

Answer 34

interest rate (also)

Question 35

What are other application areas of financial math aside from interest, annuity, amortization? 5

Answer 35

Financing calculation Yield calculation Investment calculation Price calculation Depreciation calculation

Question 36

How to calculate annuity payment?

Answer 36

A=P * q^n r/ (qn-1)