Module 3: Time Value of Money

Question 1

Amortization

Answer 1

The repayment schedule of loan principal over time. The
amortization schedule is structured in such a way that more interest and less
principal is being repaid at first, and over time the amount of principal being
repaid increases, and the amount of interest being paid decreases.

Question 2

Annuity

Answer 2

Mathematical Concept: A stream of equal payments received or paid
out over a period of time at regular intervals. Product: A life insurance product
that is frequently used as a retirement vehicle. The annuity distributes funds over
the lifetime of the recipient based on preestablished criteria. The annuity may pay
over the lives of one or more persons, may have a specified ending date, and/or
may pay a specified dollar amount.

Question 3

Annuity due.

Answer 3

An annuity for which disbursements or receipts are made at the
beginning of the period, as opposed to the end of the period.

Question 4

Discounting.

Answer 4

The reverse of compounding. An example would be taking an
amount that an individual is going to receive in the future (future value) and
discounting it back to today at a rate of return that the individual believes he can
achieve. This would then value the future dollar amount in present dollars

Question 5

Inflation-adjusted return

Answer 5

The “real” rate of return after taking into account
inflation. For example, if the rate of return was 4%, but inflation was also
running at 4%, then the inflation-adjusted return would be 0%.

Question 6

Ordinary annuity

Answer 6

Pertains to the time value of money. An annuity in which

payments are made or received at the end of the period.

Question 7

Serial payment

Answer 7

A payment that is increased each year to take into account
inflation. With a serial payment one would maintain the same amount of buying
power over time.