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Flashcards in PROP 1023 / CHAPTER 6 Deck (16):
1

_______ interest rate is a nominal rate expressed with one compounding period per annum.

Effective (annual) interest rate is a nominal rate expressed with one compounding period per annum.

2

_________ rate is an annual interest rate subject to some specified number of compounding periods per year.

ANSWER: NOMINAL INTEREST

3

_________ rate represents an interest rate per compounding period and is equal to the nominal rate divided by the number of compounding periods.

ANSWER:  PERIODIC INTEREST

4

One type of compound interest calculation frequently encountered relates to the future and present values of single payment of lump sum amounts. This is known as an ________ loan where the interest charged is added to the principal and also earns interest. 

One type of compound interest calculation frequently encountered relates to the future and present values of single payment of lump sum amounts. This is known as an interest accrual loan where the interest charged is added to the principal and also earns interest. 

5

Annuities that have payments at the beginning of payment periods are referred to as annuities ____

Annuities that have payments at the beginning of payment periods are referred to as ANNUITIES DUE

6

An _______  is defined as any investment which is characterized as a sequence of periodic payments made at equal intervals of time over a specified term.

An annuity is defined as any investment which is characterized as a sequence of periodic payments made at equal intervals of time over a specified term.

7

NOTE ONLY / ANNUITY EXAMPLE

 

The most common example of an annuity is a mortgage on an owner-occupied residential property which has equal payments occurring at uniform intervals

NOTE ONLY / ANNUITY EXAMPLE

 

The most common example of an annuity is a mortgage on an owner-occupied residential property which has equal payments occurring at uniform intervals

8

NOTE ONLY / ANNUITIES

 

In analyzing annuities, it is helpful to first review a few basic definitions:

 

The term of an annuity runs from the beginning of the first payment interval to the end of the last payment interval.

 

The compounding period is the interval of time over which interest due on the principal is calculated. There are m compounding periods in one year, and n compounding periods in the term of the loan.

 

The payment period is the period of time between payments on the annuity. Note that the 

payment periods and the compounding period are not necessarily of the same duration.

NOTE ONLY / ANNUITIES

In analyzing annuities, it is helpful to first review a few basic definitions:

 

The term of an annuity runs from the beginning of the first payment interval to the end of the last payment interval.

 

The compounding period is the interval of time over which interest due on the principal is calculated. There are m compounding periods in one year, and n compounding periods in the term of the loan.

 

The payment period is the period of time between payments on the annuity. Note that the payment periods and the compounding period are not necessarily of the same duration.

9

Annuities are distinguished according to when payments occur: annuities that have payments at the beginning of payment periods are referred to as annuities ____ ; those that have payments at the end of payment periods are referred to as _________ annuities. Alternatively, annuities with equal frequencies of compounding and payment are known as ______ annuities; those with different frequencies of compounding and payment are referred to as _______ annuities.

Annuities are distinguished according to when payments occur: annuities that have payments at the beginning of payment periods are referred to as annuities due; those that have payments at the end of payment periods are referred to as ordinary annuities. Alternatively, annuities with equal frequencies of compounding and payment are known as simple annuities; those with different frequencies of compounding and payment are referred to as general annuities.

10

A ___________ is one in which the payments are due at the beginning of the payment period and the payment interval is identical to the interest compounding period. A stream of rent payments may be considered as an example of this type of annuity.

A simple annuity due is one in which the payments are due at the beginning of the payment period and the payment interval is identical to the interest compounding period. A stream of rent payments may be considered as an example of a simple annuity due.

11

An _____________ annuity is one in which the payments are due at the end of the payment period AND the payment period is not identical to the interest compounding period.

 

This payment pattern conforms to that used almost exclusively for residential mortgages in Canada, i.e., mortgage loans with monthly payments and interest compounded semi-annually.

An ordinary general annuity is one in which the payments are due at the end of the payment period and the payment period is not identical to the interest compounding period.

 

This payment pattern conforms to that used almost exclusively for residential mortgages in Canada, i.e., mortgage loans with monthly payments and interest compounded semi-annually.

12

A general annuity due is one in which _  _ _ _ _ _

A general annuity due is one in which the payments are due at the beginning of the payment period and the payment period is not identical to the interest compounding period.

13

Loans of this type are common in development and construction financing, and on demand notes used for business financing.

ANSWER:  INTEREST ACCRUING LOANS

14

What is the rule for Net Present Value Analysis?

As a general rule, if the net present value, at the investor's required rate of return, is greater than zero, then the investment is acceptable. 

15

The _______  provides the yield on an investment, given the purchase price and expected cash flows. The investor can then compare this project's IRR with their minimum yield expectations. 

The internal rate of return (IRR) provides the yield on an investment, given the purchase price and expected cash flows. The investor can then compare this project's IRR with their minimum yield expectations.

16

NOTE ONLY / IRR

Mathematically, the IRR is calculating the rate of return that exactly equates the present value of the benefits to the initial acquisition cost. In other words, it calculates the discount rate that would result in a net present value of zero.

NOTE ONLY / IRR

Mathematically, the IRR is calculating the rate of return that exactly equates the present value of the benefits to the initial acquisition cost. In other words, it calculates the discount rate that would result in a net present value of zero.