Simple and Compound Interest Quiz

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Questions and Answers

What does the term 'principal' refer to in the context of simple interest?

  • The repayment date of the loan
  • The amount of money borrowed or invested on the origin date (correct)
  • The annual rate charged by the lender
  • The total interest earned on an investment

In the simple interest formula, what does 'rt' represent?

  • The total amount repaid by the borrower
  • The difference between future value and principal
  • The total interest paid over the loan period
  • The product of the rate and the term in years (correct)

Which formula would you use to calculate the future value of an investment using simple interest?

  • F = P(1 + rt) (correct)
  • F = P/(1 + rt)
  • F = P + Prt
  • F = Prt^2

What characterizes a simple annuity?

<p>The payment interval is the same as the interest period (D)</p> Signup and view all the answers

What is the primary difference between a simple annuity and a general annuity?

<p>Simple annuities have the same length for payment and interest periods (A)</p> Signup and view all the answers

Which statement correctly describes 'm' in the context of compound interest?

<p>The number of conversion periods per year (A)</p> Signup and view all the answers

What does the formula Ic = F - P calculate in terms of finance?

<p>The compound interest earned on an investment (A)</p> Signup and view all the answers

Which option describes the term 'm' in compound interest calculations?

<p>Conversion period frequency per year (A)</p> Signup and view all the answers

What term describes the sum of the present values of all payments in an annuity?

<p>Present Value of an Annuity (C)</p> Signup and view all the answers

Which of the following is an example of an annuity?

<p>Monthly payment for car loan (C)</p> Signup and view all the answers

What does the formula for the Present Value of a simple annuity require?

<p>Regular payment amount, interest rate, and number of payments (C)</p> Signup and view all the answers

Which of the following describes a deferred annuity?

<p>Series of payments beginning at a later date (D)</p> Signup and view all the answers

What does the Cash Value (CV) of an annuity represent?

<p>The down payment plus present value of installment payments (D)</p> Signup and view all the answers

Which statement correctly contrasts ordinary annuities and annuity due?

<p>Annuity due payments are made at the beginning of each payment interval. (A)</p> Signup and view all the answers

Which of the following accurately defines Fair Market Value?

<p>The amount equivalent to the payment stream's value at a certain date (C)</p> Signup and view all the answers

In the formula for the Future Value of a simple annuity, what variables are involved?

<p>Regular payment amount, interest rate, and compounding interval (C)</p> Signup and view all the answers

What does the period of deferral in an annuity represent?

<p>The time between the annuity purchase and the start of payments (C)</p> Signup and view all the answers

What is the primary difference between stocks and bonds?

<p>Stocks are equity financing while bonds are debt financing (C)</p> Signup and view all the answers

What is implied by investing in stocks regarding risk and return?

<p>Higher risk with a chance for higher returns (B)</p> Signup and view all the answers

What does the present value (P) of a deferred annuity account for?

<p>The timing of payments and interest rate (B)</p> Signup and view all the answers

What guarantees bondholders compared to stock investors?

<p>Guaranteed interest payments and return of principal at maturity (A)</p> Signup and view all the answers

Which of the following is true about preferred stocks?

<p>Preferred stocks have a priority claim on dividends (D)</p> Signup and view all the answers

What characterizes the investment risk associated with bonds?

<p>Bonds have fixed interest rates that mitigate risk (B)</p> Signup and view all the answers

What is a consequence of a company going bankrupt for stock investors?

<p>They may lose part or all of their investment (D)</p> Signup and view all the answers

What does the term 'dividend per share' refer to?

<p>The share of dividends allocated for each shareholder (A)</p> Signup and view all the answers

What is the primary purpose of a coupon in bond investment?

<p>To provide periodic interest payments to the bondholder (A)</p> Signup and view all the answers

Which statement accurately describes the 'fair price of a bond'?

<p>The present value of all cash inflows to the bondholder (A)</p> Signup and view all the answers

What does the term 'par value' or 'face value' mean in the context of bonds?

<p>The amount payable on the maturity date (B)</p> Signup and view all the answers

Which option best describes a 'stock market index'?

<p>A measurement of value of selected stocks within the market (B)</p> Signup and view all the answers

What is the significance of the coupon rate in bond investments?

<p>It represents the rate earned per coupon payment (D)</p> Signup and view all the answers

Which option best describes the role of 'collateral' in loan agreements?

<p>It serves as financial backing for the lender (B)</p> Signup and view all the answers

Why might investments with higher returns be more appropriate for long-term investors?

<p>They can endure market fluctuations better over time (D)</p> Signup and view all the answers

What is the term used for the total time allowed to pay off a loan?

<p>Term of the Loan (B)</p> Signup and view all the answers

Which method involves making equal payments on both principal and interest over time?

<p>Amortization Method (A)</p> Signup and view all the answers

What is a mortgage on movable property specifically called?

<p>Chattel Mortgage (A)</p> Signup and view all the answers

Which of the following correctly symbolizes a conjunction in logical propositions?

<p>p ∧ q (B)</p> Signup and view all the answers

What does the biconditional statement 'p if and only if q' signify?

<p>p and q are both true or both false (C)</p> Signup and view all the answers

Which logical connective is used to negate a proposition?

<p>Not (C)</p> Signup and view all the answers

In the context of collateral, what is required to secure a mortgage loan?

<p>Real estate or other investments (B)</p> Signup and view all the answers

What is termed as the remaining debt at a specified time in a loan agreement?

<p>Outstanding Balance (A)</p> Signup and view all the answers

Flashcards

Simple Interest Formula

Is = P * r * t

Compound Interest Formula

Ic = P[(1 + i)^n - 1]

Present Value

The current worth of a future sum of money or stream of payments, given a specified rate of return.

Principal (P)

The initial amount of money invested or borrowed.

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Interest Rate (r)

The percentage rate charged for borrowing money or earned on an investment.

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Time (t)

The length of time (in years) the money is invested or borrowed for.

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Future Value (F)

The total amount of money accumulated at the end of an investment or loan period including principal and interest.

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Simple Annuity

An annuity where the payment interval is the same as the interest period.

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Annuity

A series of equal payments made at regular intervals over a specified period of time.

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Ordinary Annuity

An annuity where payments are made at the end of each payment interval.

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Annuity Due

An annuity where payments are made at the beginning of each payment interval.

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Present Value of an Annuity

The current value of a series of future payments, discounted at a specified interest rate.

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Future Value of an Annuity

The total amount of money accumulated at the end of an investment or loan period, including principal and interest.

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Cash Flow

The movement of money into or out of a business or investment.

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Fair Market Value

The price at which an asset would change hands between a willing buyer and a willing seller in an open market.

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Deferred Annuity

An annuity where payments begin at a later date than the initial period.

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Period of Deferral

The time between buying an annuity and when payments start, the 'wait' time.

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Present Value of Deferred Annuity

The current value of the future payments, adjusted for the deferral period.

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Common Stock

Shares of ownership in a company, giving voting rights and potential dividends.

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Preferred Stock

Shares of ownership that guarantee a fixed dividend payment before common stock dividends.

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Bonds

Debt securities representing loans made by investors to a company or government.

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Equity Financing

Raising funds by selling shares of ownership in a company (stocks).

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Debt Financing

Raising funds by borrowing money from investors with a promise to repay with interest (bonds).

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Dividend

A share of a company's profits distributed to its shareholders.

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Dividend per Share

The amount of dividend paid per share.

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Stock Market

A marketplace where stocks are bought and sold.

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Market Value

The current price at which a stock can be bought or sold.

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Stock Yield Ratio

The ratio of the annual dividend per share to the market value per share.

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Par Value

The stated value of a stock as printed on the certificate.

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Coupon

Regular interest payments made to the bondholder.

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Loan Term

The total time it takes to repay a loan in full.

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Amortization

A method of paying off a loan in equal installments, typically covering both principal and interest.

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Mortgage

A loan secured by real estate, meaning the property acts as collateral.

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Chattel Mortgage

A mortgage on movable property, like vehicles or equipment.

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Collateral

Assets used to secure a loan, which the lender can claim if the borrower defaults.

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Outstanding Balance

The remaining amount owed on a loan at a specific time.

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Simple Proposition

A statement that expresses a single thought.

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Compound Proposition

A statement that combines two or more simple propositions using logical connectives.

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Study Notes

Simple Interest (Is)

  • Interest calculated on the principal, remaining constant
  • Lender/creditor: Person or institution investing money
  • Borrower/debtor: Person or institution borrowing money
  • Origin/loan date: Date money is received by borrower
  • Repayment/maturity date: Date loan is repaid
  • Time/term (t): Time in years borrowed/invested
  • Principal (P): Amount borrowed/invested initially
  • Rate (r): Annual interest rate (usually %)
  • Interest (I): Amount paid/earned for use of money
  • Maturity value/future value (F): Amount lender receives at maturity
  • Simple Interest Formula: Is = Prt or F = P + Is or F = P(1 + rt)
  • Compound Interest (Ic): Calculated on principal & accumulated past interest

Compound Interest Formula

  • Ic = F - P
  • Ic = P[(1 + i)n - 1]
  • F = P(1 + i)n

Present Value

  • P = F(1 + i)-n

Annuities

  • Sequence of payments made at fixed intervals
  • Simple Annuity: Payment interval same as interest period
  • General Annuity: Payment interval different from interest period
  • Annuity Payment (R): Fixed payment for each period
  • Payment Interval: Time between successive payments
  • Future Value of Annuity (F): Sum of future values of all payments
  • Present Value of Annuity (P): Sum of present values of all payments

Future and Present Values of a General Annuity

  • Present Value (P): P = R[1 - (1 + i)-n] / i
  • Future Value (F): F = R[(1 + i)n - 1] / i

Cash Value or Cash Price (CV)

  • Equal to down payment + present value of installment payments

Time Diagram

  • Ordinary Annuity: Payments made at end of payment intervals
  • Annuity Due: Payments made at beginning of payment intervals

Deferred Annuity

  • Series of payments starting at a later date.

Definitions of Proposition

  • Declarative sentence that is either true or false, but not both

Simple Proposition

  • Conveys one thought, no connective words

Compound Proposition

  • Contains two or more simple propositions, using connective words

Basic Logical Connectives

  • Conjunction (∧): "p and q" written as p ∧ q
  • Disjunction (∨): "p or q" written as p ∨ q
  • Conditional (→): "if p then q" written as p → q or p → q
  • Biconditional (↔): "p if and only if q" written as p ↔ q
  • Negation (~): "not p" written as ~p

Additional Concepts

  • Mortgage: Loan secured by collateral
  • Chattel Mortgage: Mortgage on movable property
  • Collateral: Assets securing a loan
  • Outstanding Balance: Remaining debt
  • Stocks: Share of ownership
  • Bonds: Debt security promising payment
  • Coupon: Periodic interest payment for bonds
  • Par Value/Face Value: Amount payable at bond maturity

Stock and Bond Definitions

  • Par Value: Per-share amount stated on company certificate
  • Stock Index/Stock Market Index: Measures value of a stock market segment
  • Business loan: Money specifically for business
  • Consumer loan: Money for personal/family purposes
  • Collateral: Assets securing a loan (real estate, investments, etc.)
  • Amortization Method: Procedure for paying loan principal and interest

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