# Describe the types of derivatives and their characteristics used in these problems.

Problem 4: This problem calculates the ordinary annuity’s present value. These steps will be required: 1) Determine a future amount. 2) Calculate the periodic amount based upon the interest rate. 3) Multiply each periodic payment with Present Valuability Factor (PVAF). 4. Add PVAF values from all periods to calculate the final present value. This problem refers to an Ordinary Annuity. An Ordinary Annuity consists in equal payments received at fixed intervals and paid at the same return rate.

Problem 5: To calculate the Future Value Interest Factor, this calculation is needed. The following steps are required to calculate FVIF: 1. Identify the number of compounding periods. 2. Choose the starting principal balance and ending balance. 3) Divide the ending balance by beginning principal balance. This will determine FVIF for a given compounding period. This particular problem utilizes a Compound Interest factor which can be defined as any interest earned not only on initial deposits but also on previous accrued interest from earlier payments – thus allowing investors/borrowers greater returns than if they were to receive simple interest only (i.e., no compound effect).

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