2 Investment Formulas

Question 1

Time Value of $

Future Value formula

Answer 1

= Principal x ( 1 + Int Rate ) ^{# periods}

ie (5k principal - 8% int - 3 periods )

5,000 x 1.08 x 1.08 1.08

Question 2

Rule of Thumb / Rule 72

what is it?

Answer 2

value to double given specifie rate

Question 3

Rule of Thumb / Rule 72 formula

Answer 3

72

yrs to double value = ————————-

Rate of Return

Question 4

10 k @ 9%

years to double value?

Answer 4

72

= ———— = 8 years = 20k

9

Question 5

Present Value Formula

Answer 5

Future Amt

= —————————————–

( 1 + Int ) ^{# periods}

Question 6

How much is needed to create

5k in 4 years @ 8%

Answer 6

= 5,000 / 1.08 / 1.08 / 1.08 / 1.08 / 1.08

= 3,675.15

Question 7

Internal Rate of Return

pg 16

Answer 7

compare 2 alternatives

higher number better

calculates series of cash flows

costs or earnings in ave. ann. rate

Question 8

Net Present Value (NPV)

what does it do

which is better

pg 16

Answer 8

like present value but for more than 1 item

only chose if > 0

highest should be chosen

Question 9

Systematic Risk

Answer 9

market risk

inv. in same system

Question 10

Inflation Risk

Answer 10

fail to out perform inflation

loss of purchasing power

Question 11

Int Rate Risk

Answer 11

Int High, Price Low

new bonds issued w/ higher int

holder of existing bond needs to sell will have to at discount

Question 12

Universal Life

Answer 12

adj premium buy

sing cash value or

lowering death bene

Question 13

Section 1035 Exchange

Answer 13

swap ins policy w/o gain

subject to tax