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Using Time Value of Money Tables quiz #1

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  • How do you use present value tables to calculate the present value of a lump sum and an ordinary annuity, and what key variables must you identify before using these tables?
    To use present value tables, first identify the interest rate (r) and the number of periods (n). For a lump sum, use the present value of \$1 table: find the factor at the intersection of n and r, then multiply it by the future lump sum amount. For an ordinary annuity, use the present value of an ordinary annuity of \$1 table: find the factor for n and r, then multiply it by the annuity payment. If payments are semiannual, divide the annual interest rate by 2 and multiply the number of years by 2 before using the tables.
  • What are the two key variables you must identify before using present value tables?
    The two key variables are the interest rate (r) and the number of periods (n).
  • Which present value table should you use to calculate the present value of a single future payment?
    You should use the present value of \$1 table for a single future payment, also known as a lump sum.
  • How do you use the present value of \$1 table to find the present value of a lump sum?
    Find the factor at the intersection of the number of periods (n) and the interest rate (r), then multiply it by the future lump sum amount.
  • Which table do you use to calculate the present value of a series of equal payments made at regular intervals?
    Use the present value of an ordinary annuity of \$1 table for a series of equal payments, which is an annuity.
  • How do you use the present value of an ordinary annuity table to find the present value of an annuity?
    Find the factor for the given n and r, then multiply it by the annuity payment amount.
  • What adjustment must you make to the interest rate and number of periods if payments are made semiannually?
    Divide the annual interest rate by 2 and multiply the number of years by 2 before using the tables.
  • In the context of bonds, what type of cash flow is the principal payment at maturity considered?
    The principal payment at maturity is considered a lump sum.
  • What type of cash flow do the periodic interest payments from a bond represent?
    The periodic interest payments represent an annuity because they are equal payments at regular intervals.
  • What is the difference between the stated interest rate and the market interest rate when valuing bonds?
    The stated interest rate determines the actual cash payments of interest, while the market interest rate is used to assess the bond's attractiveness and calculate present value.