1. What is the difference between future value and present value? Which approach is generally preferred by financial managers? Why?
  2. Define and differentiate among the three basic patterns of cash flow: (1) single amount, (2) an annuity, and (3) a mixed stream.
  3. How is the compounding process related to the payment of interest on savings? What is the general equation for future value?
  4. What effect would a decrease in the interest rate have on the future value of a deposit? What effect would an increase in the holding period have on future value?
  5. What is meant by “the present value of a future amount”? What is the general equation for present value?
  6. What effect does increasing the required return have on the present value of a future amount? Why?
  7. How are present value and future value calculations related?
  8. What is the difference between an ordinary annuity and an annuity due? Which is more valuable? Why?
  9. What are the most efficient way to calculate the present value of an ordinary annuity?
  10. How can the formula for the future value of an annuity be modified to find the future value of an annuity due?
  11. How can the formula for the present value of an ordinary annuity be modified to find the present value of an annuity due?
  12. What is a perpetuity? Why is the present value of a perpetuity equal to the annual cash payment divided by the interest rate?
  13. How is the future value of a mixed stream of cash flows calculated? How is the present value of a mixed stream of cash flows calculated?
  14. What effect does compounding interest more frequently than annually have on (a) future value and (b) the effective annual rate (EAR)? Why?
  15. How does the future value of a deposit subject to continuous compounding compare to the value obtained by annual compounding?
  16. Differentiate between a nominal annual rate and an effective annual rate (EAR). Define annual percentage rate (APR) and annual percentage yield (APY).
  17. How can you determine the size of the equal, annual, end-of-period deposits necessary to accumulate a certain future sum at the end of a specified future period at a given annual interest rate?
  18. Describe the procedure used to amortize a loan into a series of equal periodic payments.
  19. How can you determine the unknown number of periods when you know the present and future values – single amount or annuity – and the applicable rate of interest?
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