AGEC 4040 MIDTERM EXAM QUESTIONS WITH SOLVED ANSWERS

AGEC 4040 MIDTERM 2 QUESTIONS WITH SOLVED ANSWERS.



1) Time Value of Money -- Answer ✔✔ the observation that it better to receive money
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soon than later
t t




2) Compounding -- Answer ✔✔ Used to find the future value of each cash flow at the end
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of an investment's life
t t t




3) Discounting -- Answer ✔✔ Used to find the present value of each cash flow at time
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zero

4) Future Value -- Answer ✔✔ The value on some future date of money that you invest
t t t t t t t t t t t t t t t t




today

5) Compound Interest -- Answer ✔✔ Interest that is earned on a given deposit & has
t t t t t t t t t t t t t t t




become part of the principal at the end of a specified period
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6) Principal -- Answer ✔✔ The amount of money on which interest is paid
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7) Equation of Future Value -- Answer ✔✔ FVn = PV0*(1+r)n
t t t t t t t t t




8) Simple Interest -- Answer ✔✔ Interest that is earned only on an investment's original
t t t t t t t t t t t t t t




principal and not on interest that accumulates over time
t t t t t t t t




9) Present Value -- Answer ✔✔ the value in today's dollars of some future cash flow
t t t t t t t t t t t t t t




10) Discounting cash flows -- Answer ✔✔ the process of finding present values (inverse of
t t t t t t t t t t t t t t




compounding interest) t




11) Equation of Present Value -- Answer ✔✔ PV0 = FVn/(1+r)n
t t t t t t t t t

, 12) Annuity -- Answer ✔✔ A stream of equal periodic cash flows over a specified time
t t t t t t t t t t t t t t t




period (inflows or outflows) t t t




13) Ordinary Annuity -- Answer ✔✔ An annuity for which the cash flow occurs at the end
t t t t t t t t t t t t t t t t




of the period
t t




14) Annuity due -- Answer ✔✔ An annuity for which the cash flow occurs at the begging of
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each period t




15) Annuity Due vs. Ordinary Annuity -- Answer ✔✔ The Value (Present or Future) of an
t t t t t t t t t t t t t t t




annuity due is always greater than the value of an otherwise identical ordinary annuity
t t t t t t t t t t t t t




16) Perpetuity -- Answer ✔✔ An annuity with an infinite life, providing continual annual
t t t t t t t t t t t t t




cash flow t




17) Growing Perpetuity -- Answer ✔✔ An annuity with an infinite life, providing continual
t t t t t t t t t t t t t




annual cash flow, with the cash flow growing at a constant annual rate
t t t t t t t t t t t t




18) Mixed stream -- Answer ✔✔ a stream of unequal periodic cash flows that reflect no
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particular pattern t




19) Annual Percentage Rate (APR) -- Answer ✔✔ the nominal annual rate of interest,
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found by multiplying the periodic rate by the number of periods in one year, that must
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be disclosed to consumers on credit cards & loans as a result of "truth-in-lending laws"
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20) Average Percentage Yield (APY) -- Answer ✔✔ the effective annual rate of interest
t t t t t t t t t t t t t




that must be disclosed to consumers by banks on their savings products as a result of
t t t t t t t t t t t t t t t t




"truth-in-lending" laws t




21) Loan Amortization -- Answer ✔✔ the determination of the equal periodic loan
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payments necessary to provide a lender with a specified interest return and to repay
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the loan principal over a specified period.
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