1.
Differentiate between an "ordinary annuity" and an "an annuity due"?
In an ordinary annuity, the annuity payments are fed into the investment at the END of the year.
In an annuity due, the payments are made at the BEGINNING of the year. Therefore, with an
annuity due, each annuity payment accumulates an extra year of interest. This means that the
future value of an annuity due is always greater than the future value of an ordinary annuity.
When computing present value, each payment in an annuity due is discounted for one
less
year
(because one of the payments is not made in the future it is made at the beginning of this year
and is already in terms of present dollars). This will result in a larger present value for an annuity
due than for an ordinary annuity, as well.
2.
I know it is simple, but give me the definition of bond.
A bond is a debt security, in which the authorized issuer owes the holders a debt and, depending
on the terms of the bond, is obliged to pay interest (the coupon) and/or to repay the principal at a
later date, termed maturity. A bond is a formal contract to repay borrowed money with interest at
fixed intervals.
Thus a bond is like a loan: the issuer is the borrower (debtor), the holder is the lender (creditor),
and the coupon is the interest. Bonds provide the borrower with external funds to finance long
term investments, or, in the case of government bonds, to finance current expenditure. Bonds
must be repaid at fixed intervals over a period of time.
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 Fall '09
 A
 Financial Accounting, Debt, Municipal Securities Rulemaking Board

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