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Financial management > ch 4.1 flashcards > Flashcards

ch 4.1 flashcards

1
Q

What is the primary focus of Time Value of Money (TVM)?

A

The value of money changes over time due to earning potential.

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2
Q

What is another name for TVM?

A

Discounted Cash Flow (DCF) Analysis.

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3
Q

What is the formula for the future value of a lump sum?

A

FV = PV × (1 + I)^N.

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4
Q

What is the formula for the present value of a lump sum?

A

PV = FV / (1 + I)^N.

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5
Q

Define ordinary annuity.

A

Payments made at the end of each period.

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6
Q

Define annuity due.

A

Payments made at the beginning of each period.

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7
Q

What is the formula for the future value of an ordinary annuity?

A

FV = PMT × [(1 + I)^N - 1] / I.

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8
Q

What is the formula for the present value of an ordinary annuity?

A

PV = PMT × [1 - (1 + I)^-N] / I.

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9
Q

How does the formula for annuity due differ from ordinary annuity?

A

Multiply by (1 + I).

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10
Q

What is a perpetuity?

A

A financial instrument providing infinite equal cash flows.

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11
Q

What is the formula for the present value of a perpetuity?

A

PV = PMT / I.

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12
Q

What are uneven cash flows?

A

Payments that are not identical and occur irregularly.

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13
Q

How is the interest rate written for a period?

A

IR_x = x × (1 + IR%).

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14
Q

What is the formula to calculate the rate of return?

A

I = [(FV / PV)^(1/N)] - 1.

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15
Q

What is the formula for interest earned during a period?

A

INT = C × I.

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16
Q

What does FVIF stand for?

A

Future Value Interest Factor, (1 + I)^N.

17
Q

What does PVIF stand for?

A

Present Value Interest Factor, 1 / (1 + I)^N.

18
Q

How does increasing the interest rate affect the present value of a perpetuity?

A

It decreases the present value.

19
Q

What are the interchangeable terms for interest rate?

A

Cost of capital, APR, and discount rate.

20
Q

What is the relationship between PV and FV on a time line?

A

PV moves to the left, FV moves to the right.

21
Q

What is the cash flow symbol at time t?

22
Q

What is the formula for a retirement savings goal?

A

PV = FV / (1 + I)^N.

23
Q

What is the definition of time lines?

A

Visual representations of cash flows over time.

24
Q

What are the key components of TVM problems?

A

PV, FV, I, N, and PMT.

25
Q

What is the effect of compounding interest on future value?

A

It increases the future value exponentially.

Financial management (5 decks)

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