In annuity problems, what does PMT represent?

Prepare for the PHFO Quantitative Analysis For Business Exam. Study with flashcards, multiple choice questions, hints, and explanations to ensure confidence and success in your exam!

Multiple Choice

In annuity problems, what does PMT represent?

Explanation:
PMT is the fixed amount paid or received each period in an annuity or loan. It represents the cash flow per period, not the amount borrowed (principal), the interest rate, or the total number of periods. In a level-payment loan, PMT includes both interest and principal components and is set so the loan is fully paid off after the final period. For example, with a loan of PV = 10,000 at a periodic rate i for N periods, you pay the same PMT each period, covering interest and reducing the principal over time. The other concepts are PV (principal), i (interest rate per period), and N (number of periods). If you want the math form, PMT ≈ i·PV / (1 − (1+i)^−N) for end-of-period payments.

PMT is the fixed amount paid or received each period in an annuity or loan. It represents the cash flow per period, not the amount borrowed (principal), the interest rate, or the total number of periods. In a level-payment loan, PMT includes both interest and principal components and is set so the loan is fully paid off after the final period. For example, with a loan of PV = 10,000 at a periodic rate i for N periods, you pay the same PMT each period, covering interest and reducing the principal over time. The other concepts are PV (principal), i (interest rate per period), and N (number of periods). If you want the math form, PMT ≈ i·PV / (1 − (1+i)^−N) for end-of-period payments.

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