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 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.	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.
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.	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).
Annual percentage rate		E.	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.
Annuity due		F.	A 6% return that you could have earned if you had made a particular investment.
Perpetuity		G.	A type of security that is frequently used in mortgages and requires that the loan payment contain both interest and loan principal.
Future value		H.	A process that involves calculating the current value of a future cash flow or series of cash flows based on a certain interest rate.
Amortization schedule		I.	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.
Opportunity cost of funds		J.	A concept that maintains that the owner of a cash flow will value it differently, depending on when it occurs.

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 annuity due?

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

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

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

PMT/r