2- Financial maths

Question 1

What is reinvestment income?

Answer 1

The additional return an investor achieves after reinvesting their income from an investment i.e. compound interest return - simple interest return

Question 2

What is the compounding/future value formula?

Answer 2

FV = PV(1+r)^n

Question 3

What is the continuous compounding formula?

Answer 3

TV = PV x e^(r x n)

Question 4

What is the formula for present value of an annuity?

Answer 4

PV annuity = £X x 1/r[1 - 1/(1+r)^n]

Question 5

What is the formula for present value of a perpetuity?

Answer 5

PV perpetuity = £X/r

Question 6

What is the formula for Annnualised Percentage Rate (APR)?

Answer 6

APR = (1+Period rate)^n - 1

Question 7

What is the NPV formula?

Answer 7

NPV = PV of inflows - PV of outflows

Question 8

What is the Internal Rate of Return (IRR)?

Answer 8

Given a set of cash flows, the IRR is the rate of return that when used to discount the cash flows leaves the NPV equal to zero

Question 9

What is the IRR rule?

Answer 9

If IRR > Required rate then accept the project