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1. BA-FM 22P(2018)-A (LEC) Financial Analysis and Reporting > Chapter 2: Time value of money > Flashcards

Chapter 2: Time value of money Flashcards

1
Q

Is a process that considers risked and return to determine the worth or value of an asset

A

Time value of money

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2
Q

A critical consideration for financed and investment decisions

A

Time value of money

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3
Q

Are money market instruments issued at value less than their stated face value.

A

Discount instrument

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4
Q

Occurs when interest paid on the investment during the first period is added to the principal; then during the second period, interest is on this new sum

A

Compound interest

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5
Q

Formula of FV Compound annual

A

FV = PV (1 + i) n

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6
Q

The current worth of a future sum of money or stream of cash inflows given a specified rate of return

A

Present value

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7
Q

the process of determining the present value of a payment or stream of payments that is to be received in the future.

A

Discounting

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8
Q

This is the method used to figure out how much these future payments are worth today.

A

Discounting

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9
Q

the income return of an investment. This refers to the interest or dividends received from a security and is usually expressed as a percentage based on the investment’s cost its current market value or its face value

A

Yield

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10
Q

describes what an investment has concretely earned

A

Return

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11
Q

are money market instruments that are issued at a value less than their stated face value and mature for their face value

A

Discount instrument

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12
Q

gain or loss of an investment over a specified period of time expressed as a percentage increase over the initial capital investment cost

A

Rate of Return

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13
Q

Formula of Simple Interest for Future Value

A

I = P x r x t
= Prt
FV = P + I

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14
Q

I = ?
P = ?
r = ?
t = ?

A

I = Amount of Interest
P = Principal
r = rate of interest per annum
t = times the period in years

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15
Q

Formula of Future Value

A

FV = P + I

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16
Q

Suppose we deposit Php 10,000 for a year into an account that will earn 5% per annum interest income on the principal only. What will this deposit be worth at the end of the year?

A

I = Php 10,000 x .05 x 1
= Php 500

FV = P + I
= Php 10,000 + 500
= Php 10,500

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17
Q

Formula of Present Value of Simple Interest

A

PV = FV / (1 + it)

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18
Q

What is the present value of a money market instrument that will pay 10% per annum simple interest and will pay its holder Php 100,000 in 120 days?

A

PV = Php100,000
/ (1+0.10 x 120/365)
= Php 100,000 (1.03288)
= $96,816.98

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19
Q

is a loan of the government

A

Treasury Bill

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20
Q

Terms of Purchase in Treasury Bills

A

28 days (4 weeks), 91 days (13 weeks), or 1 Yr

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21
Q

How to get Purchase Price (proceeds) of a Treasury Bill

A

= The value of the Treasury bill - the discount

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22
Q

Example: If you buy a P10,000, 13-week Treasury bill at 8%, how much will you pay?

A

P10,000 x .08 x (13/52) = P200

Cost = P10,000 – P200 = P9,800

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23
Q

Example: If you buy a P10,000, 13-week Treasury bill at 8%, what is the effective rate?

A

ER = P200 / P 9,800 x (13/52)

= 8.16%

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24
Q

In some loans, interest is computed once during the life of the loan, using the ________________.

A

simple interest formula

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25
Q

interest that occurs when interest paid on the investment during the first period is added to the principal; then during the second period, interest is earned on this new sum.

A

Compound interest

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26
Q

The value (1+i) n used as a multiplier to calculate an amount’s future value

A

Future-value interest factor (FVIF i,n)

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27
Q

The value used as a multiplier to calculate an amount’s present value

A

Present-value interest factor (PVIF i,n)

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28
Q

the future value of the investment at the end of n year; the future value of the present sum

A

FVn

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29
Q

the present value or original amount invested at the beginning of the period; the current value of the future sum/payment; moving future money back to the present; discounted back to the present

A

PVn

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30
Q

the annual interest or discount rate

A

i

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31
Q

the number of years until payment will be received or during which compounding occurs

A

n

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32
Q

the number of times compounding occurs during the year

A

m

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33
Q

Future/Maturity Value Annual Periods:

A

FVn = PV (1+i)n

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34
Q

Compound Interest
Future Value of Non-annual periods

A

FVn = PV (1+ i/ m)^nxm

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35
Q

How much is Php 12,000 @ 12% per annum compounded semi- annually for two years?

A

Non-annual Periods:
FVn = PV (1+ i/m)^nm

FVn = 12,000 (1+ 0 .12/2)^2(2)
= Php 12,000 (1+.06)4
= Php12,000(1.26247696)
=15,149.73

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36
Q

How much is Php 12,000 @ 12% per annum for two years?

A

FVn = P + I

= 12, 000 + PRT

=12,000 + (12,000 x .12 x 2)

= 12,000 + 2,880

= 14,880

37
Q

How much is P12,000 @12% per annum compounded semi-annually for two years?

What is the Effective Rate?

A

= { 1 + (0.12/2) } ^2 - 1
= { 1 + 0.06} ^2 - 1
= 1.1236 – 1 = 0.1236 or 12.36%

38
Q

Formula of effective rate

A

ie = [1 + i/m]^m - 1

39
Q

The annualized interest rate that uses simple interest ratios to annualize an interest rate quoted on a fraction of a year

A

Annual Percentage Rate (APR)

40
Q

The quoted rates

A

Nominal rate

41
Q

The actual rate of interest that includes the adjustment to the nominal rate for the frequency of compounding

A

Effective rate (ie)

42
Q

This is normally the advertised or quoted rate.

A

Annual Percentage Rate (APR)

43
Q

By law lenders have to show this rate to customers.

A

Annual Percentage Rate (APR)

44
Q

It is used so that customers can easily compare financial products.

A

Annual Percentage Rate (APR)

45
Q

shows the cost of borrowing if interest is charged on an annual basis.

A

Annual Percentage Rate (APR)

46
Q

is higher than the quoted rate (APR)

A

Effective Annual Rate (EAR)

47
Q

Often, interest is not charged once a year but on a quarterly or monthly basis

A

Effective Annual Rate (EAR)

48
Q

Takes the APR (or quoted rate) and adjusts it to take into account the frequency of interest charges.

A

Effective Annual Rate (EAR)

49
Q

Formula of Present Value in Annual Periods

A

PVn = FVn [ 1 / (1+i) ]^n

or

PVn = FVn / ( 1 + i )^n

50
Q

Formula of Present Value in Non-annual Periods

A

PVn = FVn [ 1 / (1+ i/m) ^ nm ]

or

PVn = FVn / (1 + i/m)^nm

51
Q

Payment is made later

A

Ordinary Annuity

52
Q

Payment is made immediately

A

Annuity Due

53
Q

A regular stream of payments over a fixed time

A

​Annuity

54
Q

Let us assume that an interest rate of 5% per annum remains constant over the period, the future value of an ordinary annuity of $1 payments at the end of the end of next 4 periods is

A

FVA = 1 [ (1 + i)^4 - 1 / 0.05]

= 4.31

55
Q

A company has an annuity that will pay you Php 5000 per year for the next ten years. Assuming that the interest rates will average 9% per annum, how much would you expect to pay for the annuity?

A

PVA = 5,000 [1 - (1+0.09)^-10 / 0.09]

PVA = 32,088.29

56
Q

You may decide to set yourself a goal to save Php 9000 in four years (i.e. an FV) and will do so by saving regular amounts at an interest rate of 8% per annum compounded annually. If equal payments are made for each year, how much should you invest at the end of each year to reach your target?

A

PMT = [9,000 x 0.08 / (1 + 0.08)^4 -1 ]

= 1,997.29

57
Q

Suppose you are beginning your four-year university degree with Php 25, 000 in the bank. If you can invest your funds at 9% per annum, how much money can be withdrawn each year to provide for living expenses without exhausting your funds before you finish your studies?

A

PMT = [ 25000 x 0.09
/ 1- (1 +0.09)-4]

PMT = 7,716.72

58
Q

Using these cash flows below, what will the account balance be at the end of year 5 if you can earn 11% per annum over the period

1= 1,000
2 = 3,000
3 = 2,000

A

1000 x (1.11)4 = $1,518.07
3000 x (1.11)3 = $4,102.89
2000 x (1.11)2 = $2,464.20

Future value of stream
= 8,085.16

59
Q

Find the present value of the following cash flow stream where k equals 8%. Assume year-end cash flows:

1= 500
2 = 700
3 = 11,000

A

500 x 1/1.08 = 462.96
700 x 1/(1.08)2= 600.14
11,000 x 1/(1.08)3 =8,732.13

Present Value of stream
= 9,795.23

60
Q

A security that promises regular cash flows forever

A

Perpetuity

61
Q

Infinite stream of equal cash flows; Example : consol

A

Perpetuity

62
Q

Formula of Perpetuity

A

PV = C/k

63
Q

The headline rate of interest quoted by deposit takers before tax is deducted

A

Gross interest

64
Q

The interest amount paid to customers once tax has been deducted from the gross interest

A

Net interest

65
Q

For most deposits, tax on the interest is deducted __________ i.e. the bank or building society remove the tax amount before interest is paid to the depositor.

A

‘at source’

66
Q

True or False

Generally, interest received by an individual is subject to income tax.

A

True

67
Q

Additional Rate (45%)

A

Over Php 150,000

68
Q

Basic Rate (20%)

A

Php 15,000 - 50,000

69
Q

High rate (40%)

A

Php 50,001 - 120,000

70
Q

Find the accumulated value of P30,000 for 3 years at 14% compounded

a. annually

A

FV= PV (1+i)^n
=30,000 (1+0.14)^3
= 30,000 (1.481544)
= 44,446.32

71
Q

Find the accumulated value of P30,000 for 3 years at 14% compounded

b. semiannually

A

} FVn = PV (1+i/m)nm
= 30,000 (1+.14)^3(2) 2
= 30,000 (1+.07)^6
= 30,000 (1.500730352) = 45,021.91

72
Q

Find the accumulated value of P30,000 for 3 years at 14% compounded

c. quarterly

A

}FVn = PV (1+ i/m)nm
} = 30,000 (1+.14)^3(4) 4
} = 30,000 (1+.035)^12 = 30,000
} (1.511068657) = 45,332.06

73
Q

Find the accumulated value of P30,000 for 3 years at 14% compounded

e. Ordinary daily

A

} FV = PV (1 + i/m)^nxm
} FV = 30,000 (1+0.14/360)^(3)(360)
} FV = 30,000 (1.000388889)^1080
} FV = 30,000 (1.521837299)
} FV = 45,655.12

74
Q

True or False

The more the number of years, the bigger would be the terminal value

A

True

75
Q

Summer invested Php 2,500 for 2 years with an interest income of 9% per annum

How much will she get after two years?

A

}FV=P +IorP+(PRT)
} =Php2,500 +(2500x0.09x2) } = Php 2,500 + 450.00
} =Ph2,950.00

76
Q

Jack decides that he is going to buy a cheaper flat and place the remaining Php 40,000 in a deposit account. Jack also decides that he is unlikely to withdraw any of the money
within the next year unless there was an emergency.

Bank A
Given:
> Interest = 3.25%
> Bonus = 1.8%
> Paid yearly

A

40,000 x 0.0325 = 1,300 interest for the year
41,30 0 x 0.018 = 743.40 bonus interest

Jack’s cash deposit after one year = 42,043.40

77
Q

Jack decides that he is going to buy a cheaper flat and place the remaining Php 40,000 in a deposit account. Jack also decides that he is unlikely to withdraw any of the money within the next year unless there was an emergency.

Bank B
Given:
> Interest = 3.15%
> Paid quarterly

A

Interest
} 40,000 x (0.007875) = 315 (for 3 months interest)
} 40,315 x (0.007875) = 317.48 (after 6 months interest)
} 40,632.48 x (0.007875) = 319.98 (after 9 months interest)
} 40,952.46 x (0.007875) = 322.50 (after 12 months interest)

Jack’s cash deposit after one year = 41,274.96

78
Q

Jack decides that he is going to buy a cheaper flat and place the remaining Php 40,000 in a deposit account. Jack also decides that he is unlikely to withdraw any of the money within the next year unless there was an emergency.

Bank C
Given:
> Interest = 2.80%
> Bonus = 2.3%
> Paid anniversary

A

Interest
} 40,000 x 0.0280 =1,120

Bonus
} 41,120 x 0.023 = 945.76

Jack’s cash deposit after one year = 42,065.76

79
Q

Jack decides that he is going to buy a cheaper flat and place the remaining Php 40,000 in a deposit account. Jack also decides that he is unlikely to withdraw any of the money within the next year unless there was an emergency.

Bank D
Given:
> Interest = 2.75%
> Bonus = 2.22%
> Paid monthly

A

Interest
} 40,000 x (1+0.002291666667)^12
} 40,000 x (1.002291666667)^12
} 41,113.97 = Interest

} 41,113.97 x 0.0222 = 912.73 Bonus

} Jack’s cash deposit after one year is 42,026.70

80
Q

Jack decides that he is going to buy a cheaper flat and place the remaining Php 40,000 in a deposit account. Jack also decides that he is unlikely to withdraw any of the money within the next year unless there was an emergency.

Bank E
Given:
> Interest = 2.75%
> Bonus = 1.5%
> Paid yearly

A

40,000 x 0.0275 = 1,100 interest for the year
41,100 x 0.015 = 616.50 bonus interest

Jack’s cash deposit after one year = 41,716.50

81
Q

Generally, interest received by an individual is subject to _________

A

Income Tax

82
Q

Formula of Annuities (Future Value)

A

FVA = PMT x [ (1 + i)^n - 1 / i]

83
Q

Formula of Annuities (Present Value)

A

PVA = PMT x [ 1 - (1 + i)^-n / i ]

84
Q

Formula of PMT (Future Value)

A

PMT = [ FVA x i / (1+i)^n-1 ]

85
Q

Formula of PMT (Present Value)

A

PMT = [ PVA x i / 1 - (1 + i)^-n]

86
Q

Stream of Cash Flows (Future Value)

A

FV = PV (1 + i)^n

87
Q

Stream of Cash Flows (Present Value)

A

PV = FV x [1 / (1 + i)^n]

88
Q

Who are you?

A

A CPA, master degree holder, Lawyer, Doctor, an RMT and has 3 certifications in my belt.

1. BA-FM 22P(2018)-A (LEC) Financial Analysis and Reporting (7 decks)

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