Final answer:
To calculate an annual payment on a house loan, the present value of an annuity of $1 time value of money table should be used. Since a mortgage involves making regular payments over time, this is the appropriate table to use for calculating your payments accurately.
Step-by-step explanation:
When borrowing money to buy a house and needing to calculate the annual payment, you should use the present value of an annuity of $1 time value of money table. This table allows you to determine the current value of a series of equal payments to be made in the future, taking into consideration the time value of money. Since a mortgage involves making regular payments over time, this is the appropriate table to use for calculating your payments accurately.
To understand how this applies to real-world financial decisions, consider the concept of bonds and interest rate risks. When you buy a bond at a certain interest rate and the rates rise afterwards, you are faced with potential opportunity costs.
Similarly, calculating the present value of future payments (for example, using a 25% interest rate to determine that a payment of $125 a year from now is worth $100 today), helps in understanding what you essentially pay or receive in today's terms. These principles are integral to making informed borrowing and investing decisions.
The present value of an annuity of $1 table helps you determine the amount you need to borrow in order to make equal annual payments over a certain period of time. It takes into account the interest rate and the number of payments.