1. Basic concepts/Chapter 4

Finance, or financial management, requires the knowledge and precise use of the language of the field. Select the ten terms relating to the basic terminology and concepts of the time value of money on the right with the descriptions of the term on the left. Read each description carefully and select the term that best corresponds to the definition given.(Note: These are not necessarily complete definitions, but there is only one possible term for each definition.) Description Term

(1) The process of determining the present value of a cash flow or series of cash flows to be received or paid in the future Amortization schedule (table) A series of equal (constant) cash flows (receipts or payments) that are expected to continue forever

(2) 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) Amortization schedule (table)

(3) The concept that states that the timing of the receipt or payment of a cash flow will affect its value to the holder of the cash flow

(4) A schedule or table that reports the amount of principal and the amount of interest that make up each payment made to repay a loan by the end of its regular term

(5) The name given to the amount to which a cash flow, or a series of cash flows, will grow over a given period of time when compounded at a given rate of interest

(6) A type of security that is frequently used in mortgages and requires that the loan payment contain both interest and loan principal

(7) 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)

(8) A rate that represents the return on an investors best available alternative investment of equal risk

(9) 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

Choices for above

(A) Amortization schedule (table)

(B) Amortized loan

(C) Annual percentage rate

(D) Annuity due

(E) Discounting

(F) Future Value

(G) Opportunity cost of funds

(H) Ordinary annuity

(I) Perpetuity

(J) Time value of money

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 a perpetuity?

choose answer

(A) PMT x {1 /[1/(1+r)n]}

(B) PMT over r

(C) PV x (1+r)n

(D) FV /(1+r)n