Question

Finance, or financial management, requires the knowledge and precise use of the language of the field. Match the terms relating to the basic terminology and concepts of the time value of money on the left with the descriptions of the terms on the right. Read each description carefully and type the letter of the description in the Answer column next to the correct term. These are not necessarily complete definitions, but there is only one possible answer for each term.

Discounting:A. Concept that maintains that the owner of a cash flow will value it differently, depending on when it occur.
Time value of money terms:B. The amount towhich an ndividual cash flow or series of cash payments or receipt ewill grow over a period of time when earning interest at a given rate of interest.
Amortized loan:C. A type of security that is frequently used in mortgages and requres that the loan payment contain both interest and loan principal.
Ordinary annulty:D. An interest rate that reflects the return required by a lender and paid by a borrower, expressed as a percentage of the principal borrowed.
Annual percentage rate:E. A series of equal cash flows that occur at the end of each of the equally rate spaced intervals (such as daily, monthly, quarterly, and so on)
Annuity due: F. A table that reports the results of the disaggregation of each payment on an amortized loan, such as a mortgage, into its interest and loan repayment components.
Perpetuity:G. A process that involves calc lating the current value of a future cash flow or series of cash flows based on a certain interest rate Future value:H. A rate that represents the return on an investor's best available alternative investment of equal risk.
Amortization schdule:I. A series of equal (constant) cash flows (receipts or payments) that are schedule expected to continue forever
Opportunity cost of funds:J. A series of equal cash flows that occur at the beginning of each of the equaly spaced intervas (such as daily, monthly, quarterly, and so on)
Time value of money calculations can be solved using a mathernatical equation, a financial calculator, or a spreadsheet. Which of the following equations can be used to solve for the present alue of an annuity due?
A. PMT x (1-(1/ (1 + r)/r) x (1 +r)
B. PMT x (1-(1/ (1 + r)n]}
C. PMT/r
D. PMT x{[(1+r)n-1]/r*(1+r)

Answer 1

The time value of money acknowledges that money has greater value in the present than in the future. It includes concepts and calculations like present value and future value. The equation A represents the correct formula for calculating the present value of an annuity due.

Step-by-step explanation:

The time value of money is a fundamental concept in finance that reflects the idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. This core principle holds true across various financial scenarios, including savings accounts, bonds, loans, and investments. The application of this concept often involves calculations to determine the present value or future value of cash flows, as well as understanding the potential risks such as interest rate risk, where the return on a bond may become less attractive due to rising market interest rates. Additionally, opportunity costs highlight the importance of comparing the potential returns of different investments, which could influence financial decisions.

Here are the correct matches between the terms and descriptions:

• 
  
• Discounting: G. A process that involves calculating the current value of a future cash flow or series of cash flows based on a certain interest rate
• 
  
• Time value of money terms: A. Concept that maintains that the owner of a cash flow will value it differently, depending on when it occurs
• 
  
• Amortized loan: C. A type of security that is frequently used in mortgages and requires that the loan payment contain both interest and loan principal
• 
  
• Ordinary annuity: E. A series of equal cash flows that occur at the end of each of the equally spaced intervals (such as daily, monthly, quarterly, and so on)
• 
  
• Annual percentage rate: D. An interest rate that reflects the return required by a lender and paid by a borrower, expressed as a percentage of the principal borrowed
• 
  
• Annuity due: J. A series of equal cash flows that occur at the beginning of each of the equally spaced intervals (such as daily, monthly, quarterly, and so on)
• 
  
• Perpetuity: I. A series of equal (constant) cash flows (receipts or payments) that are expected to continue forever
• 
  
• Amortization schedule: F. A table that reports the results of the disaggregation of each payment on an amortized loan, such as a mortgage, into its interest and loan repayment components
• 
  
• Opportunity cost of funds: H. A rate that represents the return on an investor's best available alternative investment of equal risk

The equation that can be used to solve for the present value of an annuity due is:

A. PMT × (1-(1 / (1 + r))^n)^r) × (1 +r)

Answer 2

1. Time value of money.

2. Future value.

3. Amortized loan.

4. Annual percentage rate.

5. Annuity due.

6. Amortization schedule.

7. Discounting.

8. Opportunity cost of funds.

9. Perpetuity.

10. Ordinary annuity.

11. A

Step-by-step explanation:

1. Time value of money: concept that maintains that the owner of a cash flow will value it differently, depending on when it occur.

2. Future value: the amount to which an individual cash flow or series of cash payments or receipt will grow over a period of time when earning interest at a given rate of interest.

3. Amortized loan: a type of security that is frequently used in mortgages and requires that the loan payment contain both interest and loan principal.

4. Annual percentage rate: an interest rate that reflects the return required by a lender and paid by a borrower, expressed as a percentage of the principal borrowed.

5. Annuity due: A series of equal cash flows that occur at the end of each of the equally rate spaced intervals (such as daily, monthly, quarterly, and so on)

6. Amortization schedule: a table that reports the results of the disaggregation of each payment on an amortized loan, such as a mortgage, into its interest and loan repayment components.

7. Discounting: a process that involves calculating the current value of a future cash flow or series of cash flows based on a certain interest rate.

8. Opportunity cost of funds: a rate that represents the return on an investor's best available alternative investment of equal risk.

9. Perpetuity: a series of equal (constant) cash flows (receipts or payments) that are schedule expected to continue forever.

10. Ordinary annuity: a series of equal cash flows that occur at the beginning of each of the equally spaced intervals (such as daily, monthly, quarterly, and so on).

11. PMT x (1-(1/ (1 + r)/r) x (1 +r): an equation that can be used to solve for the present value of an annuity due. It is known as Present Value of an Annuity.