2.1 Introduction to financial mathematics

Question 1

What is the law of the time value of money?

Answer 1

• “A dollar received TODAY is WORTH MORE than a dollar received in the future”
• Why? Because the $1 today can be invested to get more money in the future!

Question 2

What is the future value?

Answer 2

• FV = PV(1 + i)^n
• FV = Future value of present value (initial amount)
• PV = Present value (initial value or amount)
• i= interest rate
• n = number of periods
• basically how much money you get with PV investment

Question 3

What is present value?

Answer 3

• “Current value of future cash flows discounted at the appropriate discount rate or factor”