1. Basic concepts

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. Time value of money B. Amortized loan C. Ordinary annuity D. Aco A process that involves calculating the current value of a future cash flow or series of cash flows based on a certain interest rate. A cash flow stream that is generated by a share of preferred stock that is expected to pay dividends every quarter indefinitely. 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). A concept that maintains that the owner of a cash flow will value it differently, depending on when it occurs. 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. One of the four major time value of money terms; the amount to which an individual cash flow or series of cash payments or receipts will grow over a period of time when earning interest at a given rate of interest. A type of security that is frequently used in mortgages and requires that the loan payment contain both interest and loan principal. Annual percentage rate E. Annuity due F. Perpetuity G. Future value H. A cash flow stream that is created by a lease that requires the payment to be paid on the first of each month and a lease period of three years. I. A 6% return that you could have earned if you had made a particular investment. Amortization schedule Opportunity cost of funds ). A value that represents the interest paid by borrowers or earned by lenders, expressed as a percentage of the amount borrowed or invested over a 12-month period. Time value of money calculations can be solved using a mathematical equation, a financial calculator, or a spreadsheet. Which of the following equations can be used to solve for the present value of an ordinary annuity? O PMT/r O PMT x {1 - [1/(1 + r)"]}/ O PMT * {[(1 + r)" - 1]/r} O PMT x {[(1 + r)" - 1]/r} x (1 + r)