a.
To Discuss: The definition of PV, I, INT, FVN, PVAA, FVAA, PMT, M and INOM.
a.
Explanation of Solution
The definition of PV, I, INT, FVN, PVAA, FVAA, PMT, M and INOM is as follows:
- PV: “PV” is denoted as “Present Value”, which is the present worth of a stream of payments or future payments which is discounted at a given interest rate. A present value is likewise the beginning amount that is expected to increase in the future.
- INT: “INT” is denoted as “Interest Rate” or I, which is the dollars of amount which is earned every period. The interest can be compounded on various basis such as, annual, semi-annual, quarterly, monthly, daily etc.
- FVN: “FVN” is denoted as “
Future Value ”, which is the closing amount of an account and where” n” is denoted as the number of compounding periods remaining in the account. - PVAA: “PVAA” is denoted as “Present Value of
Annuity ”, which is the present value of a future stream of equivalent payments. - FVAA: “PVAA” is denoted as “Future Value of Annuity”, which is the closing value of a stream of equivalent payments, where “n” is the number of compounding periods.
- PMT: “PMT” is denoted as “Payment”, which is equivalent to the dollar amount of an equivalent or consistent cash flow.
- M: “M” is denoted as “Number of Compounding Periods per year”. For example annual payments have 1 compounding periods a year and monthly payments have 12 compounding periods a year.
- INOM: “INOM” is denoted as “Nominal Rate”, or “Interest Rate”.
b.
To Discuss: The definition of
b.
Explanation of Solution
The definition of opportunity cost rate is as follows:
The opportunity cost rate (I) of an investment is the interest rate accessible for the best elective investment of comparative risk. The opportunity cost rate is the rate of interest one could procure on an elective investment with a risk equivalent to the risk of the interest that is being referred to.
c.
To Discuss: The definition of
c.
Explanation of Solution
The definition of
- Annuity: An annuity is defined as a series of payments of a fixed amount for a predetermined number of periods.
- Lump-sum payment: A lump-sum payment is defined as a single amount of an annuity, which comprises of one payment happening now or in a future period.
- Cash Flows: A cash flow can be classified into two portions. One is the
cash inflow , which is considered as a receipt. The second is thecash outflow , which is considered as the amount paid or a deposit. - Uneven cash flow stream: It is a series of cash flow wherein the amount changes starting with one period then onto the next. For example: $100 in year and $200 in year 2.
d.
To Discuss: The definition of ordinary
d.
Explanation of Solution
The definition of ordinary
- Ordinary annuity: It has payments happening during the ending of the period. A deferred annuity is simply one more name for an ordinary annuity.
- Annuity due: It has payments happening toward the start of every period. The payment time frame must be equivalent to the compounding period.
e.
To Discuss: The definition of perpetuity.
e.
Explanation of Solution
The definition of perpetuity is as follows:
A perpetuity can be defined as a series of payments of a fixed amount that last forever. In other terms, a perpetuity is an
f.
To Discuss: The definition of outflow, inflow, time line and terminal value.
f.
Explanation of Solution
The definition of outflow, inflow, time line and terminal value is as follows:
- Outflow: It is considered as a deposit, amount paid or the cost.
- Inflow: It is considered as a receipt.
- Time line: A time line is a significant device utilized in the analysis of time value of money, it is a graphical portrayal which is utilized to show the timing of each cash flows.
- Terminal value: It is the future value of uneven cash flows.
g.
To Discuss: The definition of compounding and discounting.
g.
Explanation of Solution
The definition of compounding and discounting is as follows:
- Compounding: It is the method of determining the future value of a single payment or series of cash payments.
- Discounting: It is the method of determining the present value of a single payment or series of cash payments; it is the reverse of compounding.
h.
To Discuss: The definition of annual, semiannual, quarterly, monthly and daily compounding.
h.
Explanation of Solution
The definition of annual, semiannual, quarterly, monthly and daily compounding is as follows:
- Annual compounding: It comprise of interest paid only one time a year.
- Semiannual compounding: It comprise of interest paid twice a year.
- Quarterly compounding: It comprise of interest paid once in 4 months, which makes three payments a year.
- Monthly compounding: It comprise of interest paid 12 times a year.
- Daily compounding: It comprise of interest paid for all the 365 days a year.
i.
To Discuss: The definition of effective annual rate, nominal interest rate, APR and periodic rate.
i.
Explanation of Solution
The definition of effective annual rate, nominal interest rate, APR and periodic rate is as follows:
- Effective annual rate: It is the yearly rate under annual compounding, would have delivered a similar future value towards the end of 1 year as was created by progressively visit compounding, for instance quarterly compounding.
- Nominal interest rate: It is the interest rate expressed in an agreement. If the compounding happens every year, the effective annual rate and the interest rate are the equivalent. If the compounding period happens regularly, the effective annual rate is more prominent than the nominal rate.
- APR: It is abbreviated as “Annual Percentage Rate”, which is the nominal interest rate which is compounded annually.
- Periodic rate: It is the rate charged by a financier or paid by a borrower every period. It tends to be a rate for every year, semi-annually, quarterly, monthly and daily or any other time interval.
j.
To Discuss: The definition of amortization schedule, principal versus interest component of a payment and amortized loan.
j.
Explanation of Solution
The definition of amortization schedule, principal versus interest component of a payment and amortized loan is as follows:
- Amortization schedule: An amortization schedule is a table that separates the periodic interest payments into its principal and interest payments.
- The principal component of every payment decreases the rest of the principal balance. The interest component is the interest payment on the start of-period balance of principal.
- Amortized loan: It is a type of loan that is reimbursed in equivalent intervallic amounts.
Want to see more full solutions like this?
Chapter 4 Solutions
Corporate Finance: A Focused Approach (mindtap Course List)
- Describe the essential differences between the following cash flow streams: Annuity versus perpetuity Annuity due versus ordinary annuity Illustrate with an example each.arrow_forwardDirection: Define, draw the cash flow diagram, and write the general formula of the following: ANNUITY 1. Ordinary Annuity a) Sum/Future of Ordinary Annuity b) Present Worth of Ordinary Annuity 2. Annuity Due 3. Deferred Annuityarrow_forwardCreate simple examples to illustrate the following concepts.i. Time value of moneyii. Effective interestiii. Sinking Fundiv. Amortized loanarrow_forward
- Q : Write shot note while differentiating the following.i): simple interest VS compound interest.ii): Present VS future valueiii): Annuity due VS Ordinary Annuity.iv): Amortization Schedulearrow_forwardDefine each term and state three characteristics for each term a- Pay-back period b- Discounted Pay-back period C- Internal Rate of Return (IRR)arrow_forwardWhich of the following method is used for calculating Time value of Money? a. Future Value b. All of the options c. Annuity method d. Present valuearrow_forward
- ,Match the following terms with the appropriate definition.Effective yield or interest rateMonetary liabilityCompound interestPresent ValueFuture value of a single amountA.Fixed obligation to pay an amount in cash.B.The rate at which money will actually grow.C.Interest accumulates on interest.D.Current worth of future cash flows.E.The money to which an amount invested will grow over time.arrow_forwardWhat is the factor form equation to get EUAB/Annuity (A) ?arrow_forwardThe discount rate used in a net present value analysis is the ________. A. rate of interest earned on a savings account B. rate of inflation C. rate of interest charged for debt financing of an investment D. required rate of return or the hurdle ratearrow_forward
- The process that determines the present value of a single payment or stream of payments to be received is ________. A. compounding B. discounting C. annuity D. lump-sumarrow_forwardWhich of the following is a series of constant cash flows that occur at the end of each period for some fixed number of periods .... A. Annuity B. Mezzanine Debt C. Perpetuity D. Original Investmentarrow_forwarda) DEFINE the following terminologies:i. Present valueii. Future valueiii. Periodiv. Interest ratearrow_forward
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENTCornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage Learning
- Principles of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax College