Ch 4: Time Value of Money Pt 1

Question 1

Simple Interest

Answer 1

Interest that is paid out over only one interest earning period

Question 2

Future Value Formula

Answer 2

FV = PV(1+r)^n

Question 3

PV

Answer 3

Present value of the principle or investment

Question 4

r

Answer 4

Interest rate, yield, ROR

Question 5

n

Answer 5

number of periods

Question 6

FV

Answer 6

Future value of the investment, includes amount invested plus return/profit

Question 7

When is interest compounded?

Answer 7

When an investment is held for more than one interest paying period

Question 8

Compounding period

Answer 8

Interest paying period

Question 9

What factor, ROR or time, has a greatest influence on FV?

Answer 9

Time

Question 10

Present Value

Answer 10

The value of today (the value in today’s dollars) of a future cash flow or series of cash flows

Question 11

Discounting

Answer 11

The process of going from future values to present values, the reverse of compounding

Question 12

Present Value Formula

Answer 12

PV = FV/(1+r)^n

Question 13

Discount rate

Answer 13

When ‘r’ is used to discount

Question 14

Financial Valuation Process

Answer 14

The theoretical value of any financial asset is determined by discounting all future expected cash flows to the present and adding them up

Question 15

How is the theoretical value of any financial asset determined?

Answer 15

Financial Valuation Process

Question 16

Net Present Value

Answer 16

Discounted Future Cash Flows - Initial Costs or PV of Benefits - PV of Costs

Question 17

When are you able to use net present value to compare investments?

Answer 17

Values at the same point in time, same time value of money; N and I/Y must be same for both investments

Question 18

How are ROR expressed?

Answer 18

Annual ROR

Question 19

Annuities

Answer 19

A series of equal payments made at fixed intervals for a specific number of periods

Question 20

Annuity in Arrears

Answer 20

Ordinary annuity; payments occur at the end of each period

Question 21

Ordinay Annuity Future Value Formula

Answer 21

FV = CF(1+r)^2+CF(1+r)^1+CF

Question 22

Ordinary Annuity Present Value Formula

Answer 22

PV = CF/(1+r)^1+CF/(1+r)^2+CF(1+r)^3

Question 23

Annuity Due

Answer 23

An annuity in which payments occur at the beginning of a period, ex. lease

Question 24

Examples of ordinary annuities

Answer 24

Borrowing of intangible assets, ex. loans

Question 25

Annuity Due Present Value Formula

Answer 25

PV = CF+CF/(1+r)^1+CF/(1+r)^2

Question 26

What is the payment timing for annuity due?

Answer 26

BGN

Question 27

What is the payment timing for ordinary annuity?

Answer 27

END

Question 28

Annuity Due Future Value Formula

Answer 28

FV = CF(1+r)^3+CF(1+r)^2+CF(1+r)^1

Question 29

Opportunity Cost of Capital

Answer 29

Discount/compound rate