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- What is the difference between future value and present value? Which approach is generally preferred by financial managers? Why?
- Define and differentiate among the three basic patterns of cash flow: (1) single amount, (2) an annuity, and (3) a mixed stream.
- How is the compounding process related to the payment of interest on savings? What is the general equation for future value?
- 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?
- What is meant by “the present value of a future amount”? What is the general equation for present value?
- What effect does increasing the required return have on the present value of a future amount? Why?
- How are present value and future value calculations related?
- What is the difference between an ordinary annuity and an annuity due? Which is more valuable? Why?
- What are the most efficient way to calculate the present value of an ordinary annuity?
- How can the formula for the future value of an annuity be modified to find the future value of an annuity due?
- How can the formula for the present value of an ordinary annuity be modified to find the present value of an annuity due?
- What is a perpetuity? Why is the present value of a perpetuity equal to the annual cash payment divided by the interest rate?
- 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?
- What effect does compounding interest more frequently than annually have on (a) future value and (b) the effective annual rate (EAR)? Why?
- How does the future value of a deposit subject to continuous compounding compare to the value obtained by annual compounding?
- Differentiate between a nominal annual rate and an effective annual rate (EAR). Define annual percentage rate (APR) and annual percentage yield (APY).
- 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?
- Describe the procedure used to amortize a loan into a series of equal periodic payments.
- 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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