1. Basic concepts Finance, or financial management, requires the knowledge and precise use of the language of the field. A. 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. Term Answer Description Discounting A. A cash flow stream that is generated by a share of preferred stock that is expected to pay dividends every quarter indefinitely. Time value of money B. A cash flow stream that is created by an investment or loan that requires its cash flows to take place on the last day of each quarter and requires that it last for 10 years. Amortized loan C. 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. Ordinary annuity D. A rate that represents the return on an investor’s best available alternative investment of equal risk. Annual percentage rate E. 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. Annuity due F. A loan in which the payments include interest as well as loan principal. Perpetuity G. 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. Future value H. 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. Amortization schedule I. 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. Opportunity cost of funds J. A process that involves calculating the current value of a future cash flow or series of cash flows based on a certain interest rate. B. 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 lump sum? FV/(1 + r)nn PV x (1 + r)nn PMT/r PMT x {1 – [1/(1 + r)nn]}/r

1. Basic concepts Finance, or financial management, requires the knowledge and precise use of the language of the field. A. 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. Term Answer Description Discounting A. A cash flow stream that is generated by a share of preferred stock that is expected to pay dividends every quarter indefinitely. Time value of money B. A cash flow stream that is created by an investment or loan that requires its cash flows to take place on the last day of each quarter and requires that it last for 10 years. Amortized loan C. 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. Ordinary annuity D. A rate that represents the return on an investor’s best available alternative investment of equal risk. Annual percentage rate E. 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. Annuity due F. A loan in which the payments include interest as well as loan principal. Perpetuity G. 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. Future value H. 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. Amortization schedule I. 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. Opportunity cost of funds J. A process that involves calculating the current value of a future cash flow or series of cash flows based on a certain interest rate. B. 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 lump sum? FV/(1 + r)nn PV x (1 + r)nn PMT/r PMT x {1 – [1/(1 + r)nn]}/r

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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1. Basic concepts

Finance, or financial management, requires the knowledge and precise use of the language of the field.

A. 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.

Term		Description
Discounting	A.	A cash flow stream that is generated by a share of preferred stock that is expected to pay dividends every quarter indefinitely.
Time value of money	B.	A cash flow stream that is created by an investment or loan that requires its cash flows to take place on the last day of each quarter and requires that it last for 10 years.
Amortized loan	C.	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.
Ordinary annuity	D.	A rate that represents the return on an investor’s best available alternative investment of equal risk.
Annual percentage rate	E.	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.
Annuity due	F.	A loan in which the payments include interest as well as loan principal.
Perpetuity	G.	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.
Future value	H.	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.
Amortization schedule	I.	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.
Opportunity cost of funds	J.	A process that involves calculating the current value of a future cash flow or series of cash flows based on a certain interest rate.

B. 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 lump sum?

FV/(1 + r)nn

PV x (1 + r)nn

PMT/r

PMT x {1 – [1/(1 + r)nn]}/r

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