5 Time value of money

Question 1

What is the basic formula for compound interest?

Answer 1

FV = PV(1 + r)ⁿ

Question 2

What are the key terms for the time value of money?

Answer 2

Present value (PV)
Number of time periods (n)
Interest rate (r)
Future value (FV)

Question 3

What is the formula for effective annual rate?

Answer 3

EAR = (1 + r/n)ⁿ - 1

Question 4

What are some alternative terms for effective annual rate (EAR)?

Answer 4

1. Annual percentage rate (APR)
2. Annual equivalent rate (AER)

Question 5

What is the difference between APR and AER?

Answer 5

APR is generally used for loans
AER is generally used for deposits

Question 6

How are percentages represented in time value of money formulas?

Answer 6

As decimal fractions, so 9% = 0.09

Question 7

What is the formula for paying (P) regularly into an investment?

Answer 7

FV = P{(1 + r)ⁿ - 1 / r}

Question 8

What is discounting?

Answer 8

Calculating the appropriate PV of an investment (e.g. a bond)

Question 9

What is the formula for discounting?

Answer 9

PV = FV / (1 + r)ⁿ

Question 10

What is the formula for an annuity?

Answer 10

A = P{1 - (1 + r)⁻ⁿ / r}

Question 11

What is the formula for real returns?

Answer 11

R(real) = R(nom) - R(inf)