Chapter 4 slides/hw Flashcards
The amount an investment is worth after one or more periods. This is also known as a compound value
Future Value (FV)
What term refers to the amount of money an investment will grow over some period of time at some given interest?
Future Value (FV)
The process of leaving your money and any accumulated interest in an investment for more than one period, thereby reinvesting the interest is called
List definition after slide11
Compounding
The process of accumulating interest in an investment over time to earn more interest is known as
Compounding
Interest earned on the reinvestment of previous interest payments is known as
Interest on Interest
The interest earned on both the initial principal and the interest reinvested from prior periods is known as
Compound Interest
Interest earned only on the original principal amount invested is known as
Simple Interest
T/F- Future values depend critically on the assumed interest rate, particularly for long-lived investments
True
What is the formula for future value?
PV(1 + r) t^
Suppose you invest $100 for one year at 10% per year.
What is the future value in one year?
- Interest = 100(.10)= 10
- Value in one year is
100+10 = 110
FV= 110
Suppose you invest $100 at 10% per year and decide to leave the money in for two years?
How much will you have two years from now?
FV= 100(1=0.10) ^2 (squared)
FV=121
Copy slides 3-8 in notebook
Suppose you invest $100 at 10% per year and decide to leave the money in for two years?
What is the future value in two years with simple interest?
100 *(.10) = 10
FV= 100+ 10+ 10
=120
Suppose you invest $100 at 10% per year and decide to leave the money in for two years?
What is the future value in two years with compound interest?
FV = 100(1+.10) ^2
= 121
Why does the compound interest accumulate;ate an extra dollar compared to the simple interest?
The extra 1.00 comes from the interest of .10(10) = 1.00 earned on the first interest payment
T/F- The PMT will always equal 0 for this chapter only
True
T/F- The interest must be entered on the calculate as a whole number not the percent. For example, 5% will be entered in as 5 NOT 0.05
True
T/F- When calculating future values on the calculator, you must put a POSITIVE number when the future value is negative on the calc
True
T/F- For a given interest rate, the longer the time period
the higher the future value
True
The fact that a dollar in hand today is worth more than a dollar promised at sometime in the future is referred to as
Time Value of Money
The current value of future cash flows discounted at the appropriate discount rate is known as
Present Value (PV)
Why is the present value worth less than the face value?
Due to: Opportunity costs
Risks and uncertainty
Discount Rates
Finding the present value of one or more future amounts is known as
Discounting
The calculation of the present value of some future amount is known as a
Discount
T/F- Finding Present Values is discounting, and its the REVERSE of compounding
True
The rate used to calculate the present value of future cash flows is known as
Discount Rate
What is the formula for the interest rate?
( FV / PV) ^ 1/t. - 1
The process of valuing an investment by discounting its future cash flows is known as
Discounted Cash Flow Valuation (DCF)
Calculating the present value of a future cash flow to determine its value today is known as
Discounted Cash Flow Valuation (DCF)
What is the present value equation?
Future Value DIVIDED BY (1+r) t^
add in slide 34 and 35 +other examples
Put slide 33 first
T/F- For a given interest rate, the longer the lime period
the LOWER the present value
True
For a given interest rate, what is the formula for present value?
PV = FV / (1=r) t^
As t increases, PV decreases
Interest Rates can also be defined as
Discount rates
Cost of capital
Opportunity cost of capital
Required Return
slide 38
T/F- For a given time period, the higher the interest rate, the smaller the present value
True
T/F- for a given time period, as r increases, PV decreases
True
What do the tick marks represent in the time line of cash flows?
Are listed at the end of periods
EX: Time 0 is today
Time 1 is the end of Period 1
What is the formula to find the number of periods?
N = Ln( FV/PV) DIVIDED BY Ln(1+r)
