Chapter 1 - Valuation of Future Cash Flows Flashcards
1
Q
What are the two ways to invest money?
A
- Bank deposit
- Purchase of financial asset (bond or stock)
2
Q
What represent the Present Value?
A
What price am I willing to pay for this asset now?
3
Q
How do I know if this is a good investment if I know Market Price and Present Value?
A
Market Price < Present Value = Good
Market Price > Present Value = Bad
4
Q
What is the formula for the present value of a Cash Flow?
A
= CF / (1+r)^t
5
Q
What is the relation between PV and Market Price for:
- Bank deposit
- Financial asset
A
- Bank deposit: PV = Market Value
- Financial asset: PV < Market Value because risk and higher interest rate
6
Q
High risk = ?
A
= high required return
= high discount rate
7
Q
What is the difference between risk-free and risk in an investment?
A
- Risk-free: future cashflows are guaranteed (discount rate = bank interest rate)
- Risk: add a risk premium for the discount rate
8
Q
Relation between risk and PV?
A
The higher the risk, the lower the PV
