Chapter 1 Introduction to valuation: the time value of money Flashcards

1
Q

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

A

compounding

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1
Q

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

A

future value (FV)

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2
Q

interest earned on the reinvestment of previous interest payments

A

interest on interest

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3
Q

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

A

compound interest

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4
Q

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

A

simple interest

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5
Q

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

A

interest rate

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6
Q

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?)

A

present value (PV)

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7
Q

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

A

discount it back to the present

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8
Q

calculate the present value of some future amount

A

discount

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9
Q

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

A

discount rate

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10
Q

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

A

Discounted cash flow (DCF) valuation

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11
Q

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

A

declines

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12
Q

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

A

the lower the present value will be

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13
Q

Present value factor is the reciprocal of what

A

future value factor

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14
Q

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%

A

Rule of 72

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15
Q

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

A

time value of money

16
Q

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

A

the greater the future value

17
Q

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

A

the greater the future value

18
Q

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

A

the greater the future value

19
Q

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

A

the lesser the present value

20
Q

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

A

the lesser the present value

21
Q

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

A

the lesser the present value

22
Q

finance would not exist if not for what 2 things

A

interest
time

23
Q

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

A

ordinary annuity

24
an annuity for which the cash flows occur at the beginning of each period
annuity due
25
an annuity in which the cash flows continue forever (ex. preferred stock)
perpetuity
26
Present value of a perpetuity formual
C/r
27
the interest rate expressed as if it were compounded once per year
Effective annual rate (EAR)
28
the interest rate charged per period multiplied by the number of periods per year
Annual percentage rate (APR)
29
to have a borrower pay the interest each period plus some fixed amount
amortizing
30
the borrower repays parts of the loan amount over time
amortized loan
31
amount you have left to pay on your loan
loan balance