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mediumAnnuities

A person makes a loan payment at the end of each month. How is that series of payments classified?

AIt is an ordinary annuity, because each payment is made before the monthly period begins.
BIt is an annuity due, because each payment is made at the start of the monthly period.
CIt is an ordinary annuity, because each payment is made at the end of the monthly period.
DIt is an annuity due, because each payment is made after the monthly period closes.
Incorrect
The classification depends on when the payment falls within the period, not on its being monthly. A payment at the end of the month makes it an ordinary annuity.

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  1. PDFCorporate_Finance_Unit_1.pdf
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  2. 48questions
    81flashcards
    • 1Using the Rule of 72, about how long does it take to double an amount at 8% compounded annually?
    • 2An investment of $100,000 at 10% a year grows to $150,000 with simple interest and to $161,051 with compound interest after 5 years. What explains the difference?
    • 3A $75,000 promissory note matures in 9 months and is discounted at 14% simple annual interest. What is its present value?
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  3. Readiness Score78%
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Day 13714
Without practicing againPracticing on different days

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Annuities
  1. 1easy
  2. 2easy
  3. 3medium
  4. 4medium
  5. 5hard
  6. 6medium
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Why each question comes up

  1. 1
    AnnuitiesStrugglingGoes first
  2. 2
    Compound interestHalfwaySwitches topic so it doesn't repeat
  3. 3
    AnnuitiesStrugglingComes back soon
  4. 4
    Perpetuities and amortization schedulesMasteredComes up rarely, just for review
  5. 5
    AnnuitiesStrugglingComes back soon
  6. 6
    Compound interestHalfwayIt was its turn

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A person deposits $200,000 at 9% compounded annually for 3 years. What is its future value?

BThey will have $254,000, because 200000(1+3×0.09)=254000.
CThey will get $259,005.80, because 200000(1.09)³=259005.80.
Incorrect

The expression 200000(1+3×0.09) adds interest always computed on the original principal. With compounding, each period multiplies the accumulated amount by 1.09.

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How does compounding work in compound interest?

What is an ordinary annuity?

What is a perpetuity?

Each period's interest is added to the principal and, from then on, earns interest too.

It is one in which each payment occurs at the end of each period. A regular monthly loan payment is an example.

It is an annuity that never ends, that is, an infinite series of periodic payments.

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TopicAnnuities
QuestionOne you haven't seen
Difficultymedium
A plan deposits $5,000 at the end of each month for 24 months and pays 1.5% a month. What is the approximate future value of the deposits?

Adaptive Study

StudyBuddy uses your performance to decide which topic, question and difficulty should come next, so no session is wasted.

Time value of money and simple interest86%
Compound interest72%
Annuities51%

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Readiness Score
78%
Nearly Ready
3 of 4 topics studied, based on coverage and your Adaptive Study performance

Topics

Time value of money and simple interest
9 correct out of 10 attempts. Last review: 10 days ago
Topic mastery: 86%
You've seen all 10 questions of this topic
Compound interest
8 correct out of 10 attempts. Last review: 10 days ago
Topic mastery: 72%
You've seen all 10 questions of this topic
Annuities
7 correct out of 10 attempts. Last review: 10 days ago
Topic mastery: 51%
You've seen 10 of this topic's 12 questions

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