Ch 4

Question 0

Compounding

Answer 0

Process of accumulating interest in an investment

Over time to earn more interest

Question 1

Future Value (FV)

Answer 1

Amount investment is worth after 1 or more periods

Question 2

Interest on interest

Answer 2

Interest earned on reinvestment of previous interest

Payments

Question 3

Compound interest

Answer 3

Interest earned on both initial principle and interest

Reinvested from prior periods

Question 4

Simple interest

Answer 4

Interest earned only on original principal amount invested

Question 5

Future value interest factor equation?, abbreviation?

Answer 5

Future value = $(1 + r)^t = FVIF(r,t)

r = % interest
t = amount of time

Question 6

Calculator requirements for cash outflows and inflows?

Answer 6

Put - sign for cash outflows

Put + sign for cash inflows

Question 7

Present value (PV)

Answer 7

Current value of future cash flows discounted at

Appropriate discount rate

Question 8

Present value to get $1 in 1 year from a 10% investment?

Answer 8

Present value X 1.1 = $1
=$1/1.1 = $0.909

Present value = $.909

Question 9

Discount

Answer 9

Calculate present value of some future amount

Question 10

Present value equation?

Answer 10

PV = $1 X (1/(1 + r)) = $1/(1 + r)

Question 11

Present value equation multiple periods?

Answer 11

PV = $1/(1 + r)^t

Question 12

Discount rate AKA Discount factor, ex?

Answer 12

Rate used to calculate present value of future cash flows

Ex. 1/(1 + .15)^3 = .6575, where .6575 is the discount factor

Question 13

Discounted cash flow (DCF) valuation

Answer 13

Valuation calculating the present value of future cash flow

To determine its value today

Question 14

1/(1 + .15)^3 = .6575, $1,000 x .6575 = $657.50, which number is the discount factor and which number is the present value?

Answer 14

.6575 is discount factor

$657.50 is the present value

Question 15

Relationship btw the present value factor and future value factor?

Answer 15

The present value factor is the reciprocal ($1/(1+r)^t))

of the future value factor (($1+r)^t)

Question 16

Basic present value equation? What do you calculate when you solve for r?

Answer 16

PV X (1 + r)^t = FV

PV = FV/((1 + r)^t) = FV X (1/((1 + r)^t))

When you solve for r, you are calculating the rate of return

Question 17

The rule of 72?

Answer 17

Calculates for reasonable rates of return (5-20% range)
The time it takes to double your money

72/r%