Chapter 1 Introduction to valuation: the time value of money

Question 1

the process of accumulating interest on an investment over time to earn more interest

Answer 1

compounding

Question 1

the amount an investment is worth after one or more periods (the cash value of an investment at some time in the future

Answer 1

future value (FV)

Question 2

interest earned on the reinvestment of previous interest payments

Answer 2

interest on interest

Question 3

interest earned on both the initial principal and the interest reinvested from prior periods

Answer 3

compound interest

Question 4

interest earned only on the original principle amount invested (interest is not reinvested

Answer 4

simple interest

Question 5

the rate at which your money grows, assuming you dont remove any of it on an interest bearing account you are depositing money in

Answer 5

interest rate

Question 6

the current value of future cash flows discounted at the appropriate discount rate (How much do we have to invest to day at 10% to get $1 in one year?)

Answer 6

present value (PV)

Question 7

Present value instead of compounding the money forward like future value, we ?

Answer 7

discount it back to the present

Question 8

calculate the present value of some future amount

Answer 8

discount

Question 9

the rate used to calculate the present value of future cash flows

Answer 9

discount rate

Question 10

calculating the present value of a future cash flow to determine its value today

Answer 10

Discounted cash flow (DCF) valuation

Question 11

As the length of time until payment grows Present value does what

Answer 11

declines

Question 12

The higher the discount rate is, what happens to present value

Answer 12

the lower the present value will be

Question 13

Present value factor is the reciprocal of what

Answer 13

future value factor

Question 14

whatever the interest rate or time period is, divide that by 72 to geta. rough estimate of the other value
72/r or 72/n
works best for values between 5 to 20%

Answer 14

Rule of 72

Question 15

a dollar in hand today is worth more than a dollar promised at some time in the future

Answer 15

time value of money

Question 16

the longer the period of time, what happens ot the future value

Answer 16

the greater the future value

Question 17

the higher the interst rate, what happens to the future value

Answer 17

the greater the future value

Question 18

the more frequently interest is compounded, what happpens to the future value

Answer 18

the greater the future value

Question 19

the longer the period of time, what happens to the present value

Answer 19

the lesser the present value

Question 20

the higher the interest (discount) rate, what happens to the present value

Answer 20

the lesser the present value

Question 21

the more frequently interest is discounted, what happens to the present value

Answer 21

the lesser the present value

Question 22

finance would not exist if not for what 2 things

Answer 22

interest
time

Question 23

a series of constant or level cash flows that occur at the end of each period for some fixed number of periods

Answer 23

ordinary annuity

Question 24

an annuity for which the cash flows occur at the beginning of each period

Answer 24

annuity due

Question 25

an annuity in which the cash flows continue forever (ex. preferred stock)

Answer 25

perpetuity

Question 26

Present value of a perpetuity formual

Answer 26

C/r

Question 27

the interest rate expressed as if it were compounded once per year

Answer 27

Effective annual rate (EAR)

Question 28

the interest rate charged per period multiplied by the number of periods per year

Answer 28

Annual percentage rate (APR)

Question 29

to have a borrower pay the interest each period plus some fixed amount

Answer 29

amortizing

Question 30

the borrower repays parts of the loan amount over time

Answer 30

amortized loan

Question 31

amount you have left to pay on your loan

Answer 31

loan balance