Quiz 2 topics for final exam.pdf

Interest and Money – Time Relationships: Simple Interest Simple Interest Interest – is the return on capital or cost of using capital. It is the amount of money paid for the use of borrowed capital or the income produced by money, which has been loaned. Simple Interest – is calculated using the prin...

Interest and Money – Time Relationships: Simple Interest Simple Interest Interest – is the return on capital or cost of using capital. It is the amount of money paid for the use of borrowed capital or the income produced by money, which has been loaned. Simple Interest – is calculated using the principal only, ignoring any interest that been accrued in preceding period. Types of Simple Interest Ordinary Simple Interest – simple interest in which it is assumed that each month contains 30 days and, consequently, each year has 360 days. 1 month = 30 days 1 year = 360 days (banker’s year) Exact Simple Interest – simple interest in which the exact number of days per month is used. 1 ordinary year = 365 days 1 leap year = 366 days Compound Interest Compound Interest – the interest for an interest period is calculate on the principal plus total amount of interest accumulated in the previous period. Compound interest means “the interest on top of interest” Rate of Interest Rate of Interest it is the cost of borrowing money Nominal Rate of Interest it specifies the rate of interest and a number of interest periods in one year Effective Rate of Interest – it is the actual or exact rate of interest on the principal during one year. Values of “m” m = 1 for compounded annually or yearly (every 12 months) m = 2 for compounded semi-annually (every 6 months) m = 4 for compounded quarterly (every 3 months) m = 6 for compounded bi-monthly(every 2 months) m = 8 for compounded semi-quarterly (every 1 1/2 months) m = 12 for compounded monthly(every month) m = 24 for compounded semi-monthly(every 1/2 month) m = 365 for compounded daily (every 360 days) Cash Flow Diagram Cash Flow Diagram – depicts the timing and amount of expenses (negative, downward) and revenues (positive, upward) for engineering projects. Equation of Value An equation of value is obtained by setting the sum of the values on a certain comparison or local date (or focal date) of one set of obligations equal to the sum of the values on the same date of another set of obligations. Discrete Payments The solution of discrete payments or number of transactions occurring at different periods is taking each transaction to the base year and equating each value. Annuity Annuity – it is a series of equal cash flows occurring each period over a range of periods. Types of Annuity: 1. Ordinary Annuity 2. Deferred Annuity 3. Annuity Due 4. Perpetuity Ordinary Annuity – is a series of equal payments or receipts occurring over a specified number of periods with the payments or receipts occurring at the end of each period. It is also referred as annuity-immediate. Deferred Annuity – are annuities that are computed on different present year and/or future year. It is annuity where the first payment is made several periods after the beginning of the annuity. Annuity Due – is a series of equal payments or receipts occurring over a specified number of periods with the payments or receipts occurring at the beginning of each period. Perpetuity – are uniform payments which are done infinitely. It is also called as perpetual annuity. Types of Perpetuity 1.Ordinary Perpetuity – first payment is done one period after the focal date. 2.Deferred Perpetuity – first payment is done several periods after the focal date.