Chapter 4 - TVM

Question 1

Principal

Answer 1

the initial size of a loan

Question 2

The interest remains constant. Set level of interest that occurs every period. Calculated based on the principal investment amount.

Answer 2

Simple Interest

Question 3

Interest that grows, you earn interest on interest. If you have 2500 and then the next year that grows to x amount because of interest rate, the next period will bild interest off x, not the principal.

Answer 3

Compound Interest

Question 4

Future Value

Answer 4

Investments generate interest, a sum of $100 today will be more in 4 years time because of interest. This is called compounding

Question 5

Present Value

Answer 5

The process is called discounting. $100 dollars in 5 years time will be worth less today.

Question 6

Compounding

Answer 6

Finding Future value

Question 7

Discounting

Answer 7

Finding Present Value

Question 8

Multiple CFs that are the same, occur at frequent intervals, for a set period of time, beginning in one periods time.

Answer 8

Annuity

Question 9

Multiple CFs that are the same, occur at frequent intervals, for a set period of time, beginning today

Answer 9

Annuity Due

Question 10

Multiple CFs that are the same, that occur frequently that last FOREVER beginning in one periods time

Answer 10

Perpetuity

Question 11

Multiple CFs that grow from an initial amount that occur at frequent intervals, last FOREVER beginning in one periods time

Answer 11

Growing Perpetuity

Question 12

Cash Flow

Answer 12

The net amount of cash and cash equivalents being transferred into and out of a business.

Question 13

Semiannual

Answer 13

Twice a year

Question 14

Quarterly

Answer 14

4 times a year

Question 15

Monthly

Answer 15

12 Times a year

Question 16

Daily

Answer 16

365 Times a year

Question 17

A stream of cash flows that occur at consistent intervals, have the same value and occur for a set period of time

Answer 17

Ordinary Annuity

Question 18

Annuity Checklist

Answer 18

• Are cash flows the same size
• Do they occur at equal intervals (eg end of every week/ year/ month)
• Do the cash flows occur for a set period of time? ( Do they have an end date)
• Do cash flows begin in one periods time?

Question 19

What does M stand for

Answer 19

The number of compounding payments

Question 20

What does C stand for

Answer 20

CashFlow

Question 21

What is a Constant Cash flow

Answer 21

Like paying something off, consistent payments of a. how long or b. How much

Question 22

When figuring out Constant Cash flow Present value (e.g deposit) What do you do with the ‘r’ and ‘t’ if it is semi annual?

Answer 22

Semi annual means 2, you divide the ‘r’ by 2 and TIMES the t by 2.

Question 23

What formula would you use for: How many yearly payments of $15,000 must be made in order to pay back a mortgage of $200,000 with 4.5% interest per year?

Answer 23

Ordinary Annuity, Number of payments (PV) Because you already have the mortgage.

Question 24

What formula would you use for: What semi-annual deposit must be made in order to accumulate $10,000 by the end of your degree (3 years) with 3.5% interest per annum?

Answer 24

Ordinary annuity, Constant Cash flow (FV) Because you don’t have it yet

Question 25

What formula would you use for: You have accumulated a bill of $25,000 on your credit card. What monthly payment is required if you wish to repay the bill in 2 years’ time with 3% interest per annum?

Answer 25

Ordinary Annuity, Constant Cash flow (PV) because you already have the money.

Question 26

What formula would you use for: How many yearly payments of $300 must be made in order to accumulate $5000 with 8% interest compounded annually?

Answer 26

Ordanairy Annuity, Number of payments (FV) Because you dont have the $5000 yet.

Question 27

Annuity Dues

Answer 27

Stream of cash flows for a fixed period of time starting TODAY t=0.

Question 28

Difference between Annuity Due and Ordinary Annuity

Answer 28

Annuity due formula has one more period to accumulate interest, it has (1+r) added to it

Question 29

Annuity Due Checklist

Answer 29

Same as ordinary annuity but cash flows begin TODAY.

Question 30

Constant stream of cash flows, for an INFINITE period of time, No future value as there is NO END.

Answer 30

Perpetuity

Question 31

Perpetuity Characteristics

Answer 31

Only can calculate Present value and Rate of return, no future value because there is no end.

Question 32

Constant stream of cash flows, that GROWS from an initial anount, forver. E.g GVMT paying students $200 p/w and increase payments by 1% p/w.

Answer 32

Growing Perpetuity

Question 33

Working out formulas: Do cash flows start today?

Answer 33

If no, Lump sum. If yes, Annuity or perpetuity

Question 34

Working out formulas: Do cash flows occur forever?

Answer 34

If yes, Perpetuity or Growing Perpetuity. If no, Ordanairy annuity or Annuity due

Question 35

Working out formulas: Do payments start today? t=0

Answer 35

if no, ordinary annuity. If yes, Annuity due.

Question 36

Types of loans:

Answer 36

- Interest-only loan - Pure discount loan - Amortized loan

Question 37

Interest and principal are paid at maturity ( the end )

Answer 37

Pure discount loan

Question 38

equal payments made each year, includes both principal and interest. At maturity principal will be paid off

Answer 38

Amortized loan

Question 39

Interest is paid at frequent intervals, the principal is paid at Maturity.

Answer 39

Interest only loan