Chapter 4: TVM (Week 1)

Question 1

TVM

Answer 1

describes the relationship between the value of a current dollar and the value of a future dollar

Question 2

Discount rates include a variety of time related variables

Answer 2

• Inflation
• Consumer preferences
• Risk (what if the future cash flow is not certain?)

Question 3

Government bond yields are…

Answer 3

“Risk-free rate” or “interest rate”

Question 4

Corporate bond yields (inflation, time, and credit risk)

Answer 4

• “corporate spread” (to government yields)

- “cost of debt”

Question 5

Equities (inflation, time, and equity risk)

Answer 5

• Capital asset pricing model “CAPM”, black-Scholes, binomial, many others
• “Cost of equity” or “ required rate of return for equity” or “expected rate of return for equity”

Question 6

All interest rates are also…

Answer 6

a discount rate

Question 7

All cost of equity “rates” are also…

Answer 7

a discount rate (for equities)

Question 8

Value depends on…

Answer 8

• the assumed cash flow
• assumed discount rate
• It has no physical reality