Chapter 3 Flashcards
Define and provide an example of time value of money
Time value of money= willingness of banks, businesses, and people to pay interest for the use of various sums.
An example would be calculating the interest of the money I will be depositing in my savings account.
Difference between single and compound interest
Single interest is the interested computed only to the original sum.
compound interest where the interests are acquired over the over bc they weren’t payed at the end of the year. “Interest on interest”
Formula for single interest
F= P (1+in)
Formula for compound interest
FV = PV (1+i)n
Explain equivalence of cash flow
The equivalence is indifferent of the future sums or series of future sums.
If given 2 plans one with a 15 yr loan and 30 yr for the other which one would be the best choice.
They’re both the same, however with the 15 yr plan loan there’s no room to spend only save and pay. With the 30 yr loan you can save and pay but you have a leeway to spend today.
True or False: Equivalence are dependent of interest rates.
True, if a debt is being paid with a certain amount and interest rate, and that interest rate is then increased, the lender would have to pay a higher amount to finish paying the debt. Bc the old amount wouldn’t be able to sustain or reach the potential of the increased interest rate.
