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CHAP 5 Fin 335 Cengage (DETAILED ANSWERS) 2024 - DISTINCTION GUARANTEED.pdf
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8/5/24, 8:36 AMCHAP 5 Fin 335 Cengage
Jeremiah
Terms in this set (22)
One of the four major time value of money terms; the amount to which an individual
Discounting 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.
The financial concept that maintains that the timing of a receipt or payment of a cash
flow will affect its value is called the time value of money (TVM). The time value of
money illustrates that, due to its capacity to earn interest, a cash flow received today is
Time value of money worth more than an identical cash flow to be received on a future date. The exact
current value of a future cash flow is a function of the magnitude of the future cash
flow, the return required by the owner (recipient) of the cash flow, and when in the
future the cash flow will occur.
An amortized loan is one that is repaid with payments that are composed of both the
interest owed on the loan and a portion of the loan’s principal. In contrast, a zero-
Amortized loan
interest loan is one on which interest is not charged and the payments made to repay
the loan will consist only of principal.
A series of equal cash flows that are paid or received at regular intervals, such as a day
or a month, is called an annuity. When the cash flows occur at the end of each of the
regular intervals, the series is called an ordinary annuity. An example of an ordinary
Ordinary annuity annuity is the 60 monthly payments of $676.65 made at the end of each month to repay
a $35,000 loan that charges 6% interest and is to be repaid over five years. If the cash
flow were to occur at the beginning of each of the regular intervals, then the annuity
would be called an annuity due.
The annual percentage rate (APR) is the cost of borrowed funds as quoted by lenders
and paid by borrowers, in which the interest required is expressed as a percentage of
Annual percentage rate
the principal borrowed. This rate does not reflect the effects of compounding if interest
is earned more than once per year.
An annuity due is the name given to a series of equal cash flows that occur at the
Annuity due beginning of each of the equally spaced intervals (such as daily, monthly, annually, and
so on).
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