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.

Term	Answer		Description
Discounting		A.	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.
Time value of money		B.	A type of security that is frequently used in mortgages and requires that the loan payment contain both interest and loan principal.
Amortized loan		C.	An interest rate that reflects the return required by a lender and paid by a borrower, expressed as a percentage of the principal borrowed.
Ordinary annuity		D.	The process of determining the present value of a cash flow or series of cash flows to be received or paid in the future.
Annual percentage rate		E.	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.
Annuity due		F.	A rate that represents the return on an investors best available alternative investment of equal risk.
Perpetuity		G.	A concept that maintains that the owner of a cash flow will value it differently, depending on when it occurs.
Future value		H.	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).
Amortization schedule		I.	A cash flow stream that is generated by a share of preferred stock that is expected to pay dividends every quarter indefinitely.
Opportunity cost of funds		J.	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).

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?

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

PV x (1 + r)nn

FV/(1 + r)nn

PMT/r