1.2 Present value tables are based on compound interest and not on simple interest. 1.3 Amounts discounted a high interest rate will have a higher net present value than amounts discounted with a low interest rate. 1.4 An amount compounded 12 times a year at an annual interest rate of 12 % will result in a bigger future value than the same amount compounded quarterly at an annual interest rate of 12 %. 1.5 An annuity is a stream of equal periodic cash flows over a specified future time period. 1.6 A perpetuity is an annuity that's provides a continual annual cash flow for an infinite time period. 1.7 Nominal rate is the same as the effective annual rate. 1.8 Interest paid (earned) on both the original principal borrowed (lent) and previous interest earned is often referred to as simple interest. 1.9 The rate of interest is used to express the time value of money. 1.10 For a given nominal interest rate, the more numerous the compounding periods, the less the effective annual interest rate. 1.11 In 2 years you are to receive R10,000. If the interest rate were to suddenly decrease, the present value of that future amount to you would increase. 1.12 Assume that the interest rate is greater than zero. Would you prefer R600, R1 000 and R400 cash-inflow streams totalling R2 000? The cash flows are listed in order for Year 1, Year 2, and Year 3 respectively. 1.13 All other things remaining the same, an annuity received at the beginning of each period has more present value than does one received at the end of each period. 1.14 Investors in the firm also expect to be compensated for the erosion in the value of the investment capital. 1.15 An annuity is the receipt and not a payment of a fixed amount over a number of years or periods.MATCHING QUESTIONS latch each term with the appropriate definition by writing the appropriate letter in the space provided. Term Definition 2.1 Time value of money (a) Interest earned on the original amount invested plus interest earned from previous periods that was capitalised (added to original amount). 2.2 Simple interest (b) The process of paying off a long term loan by making periodic payments which are part interest and capital (Repayment of loon) 2.3 Compound interest (C) Interest earned once on the original amount invested 2.4 Nominal interest rate (d) The value of R1 today is different to R1 received in the future. 2.5 Effective Annual Rates (EAR) (e) : The stream of cash flows that are forever. 2.6 Treasury Bills (1) The initial interest rate quoted by a financial institution on investments. Perpetuities (consols) (@) Annuity payable at the beginning of the month is an annuity due. 2.8 Amortisation (h) The actual rate of interest earned on an investment (original amount and interest). (0) The government borrows money from the general public