Chapter 4 - TVM Flashcards

1
Q

Principal

A

the initial size of a loan

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

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

A

Simple Interest

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

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.

A

Compound Interest

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Future Value

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Present Value

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Compounding

A

Finding Future value

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Discounting

A

Finding Present Value

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

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

A

Annuity

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

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

A

Annuity Due

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

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

A

Perpetuity

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

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

A

Growing Perpetuity

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Cash Flow

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Semiannual

A

Twice a year

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Quarterly

A

4 times a year

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Monthly

A

12 Times a year

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Daily

A

365 Times a year

17
Q

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

A

Ordinary Annuity

18
Q

Annuity Checklist

A
  • 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?
19
Q

What does M stand for

A

The number of compounding payments

20
Q

What does C stand for

A

CashFlow

21
Q

What is a Constant Cash flow

A

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

22
Q

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?

A

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

23
Q

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?

A

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

24
Q

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?

A

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

25
Q

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?

A

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

26
Q

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?

A

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

27
Q

Annuity Dues

A

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

28
Q

Difference between Annuity Due and Ordinary Annuity

A

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

29
Q

Annuity Due Checklist

A

Same as ordinary annuity but cash flows begin TODAY.

30
Q

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

A

Perpetuity

31
Q

Perpetuity Characteristics

A

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

32
Q

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.

A

Growing Perpetuity

33
Q

Working out formulas: Do cash flows start today?

A

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

34
Q

Working out formulas: Do cash flows occur forever?

A

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

35
Q

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

A

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

36
Q

Types of loans:

A
  • Interest-only loan
  • Pure discount loan
  • Amortized loan
37
Q

Interest and principal are paid at maturity ( the end )

A

Pure discount loan

38
Q

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

A

Amortized loan

39
Q

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

A

Interest only loan