CHAPTER 4 Flashcards
We refer to a series of cash flows lasting several periods as a stream of cash flows.
YES
Not every stream of cash flows can be represented on a timeline.
NO
Timelines are an important first step in organizing and then solving a financial
problem.
YES
A timeline is a linear representation of the timing of the (expected) cash flows.
YES
The space between date 0 and date 1 represents the time period between two
specific dates.
YES
You will find the timeline most useful in tracking cash flows if you interpret each
point on the timeline as a period or interval of time.
NO
Date 0 is the beginning of the first year.
YES
Date 1 is the end of the first year.
YES
The effect of earning interest on interest is known as compound interest.
YES
It is only possible to compare or combine values at the same point in time.
YES
The process of moving a value or cash flow forward in time is known as
compounding.
YES
A dollar in the future is worth more than a dollar today.
NO
FV = C / (1 + r)^N
NO
The value of a cash flow that is moved forward in time is known as its future value.
YES
The process of moving a value or cash flow backward in time is known as discounting.
YES
The process of moving a value or cash flow forward in time is known as compounding.
YES
A perpetuity is a stream of equal cash flows that occurs at regular intervals and
lasts forever.
YES
PV of a perpetuity = r / C
NO
To find the value of a perpetuity one cash flow at a time would take forever.
YES
One example of a perpetuity is the British government bond called a consol.
YES
PV of a growing perpetuity = C / r-g
YES
We assume that r < g for a growing perpetuity.
NO
A growing perpetuity is a cash flow stream that occurs at regular intervals and
grows at a constant rate forever.
YES
To find the value of a growing perpetuity one cash flow at a time would take
forever.
YES
A growing perpetuity is a cash flow stream that occurs at regular intervals and
grows at a constant rate forever.
YES
An annuity is a stream of N equal cash flows paid at irregular intervals.
NO
Most car loans, mortgages, and some bonds are annuities.
YES
The difference between an annuity and a perpetuity is that an annuity ends after
some fixed number of payments.
YES
