Chapter 5

Question 1

What is the Future Value (FV)?

Answer 1

An amount to which an investment will grow after earning interest.

Question 2

What are compound interests?

Answer 2

They’re interests that earn interest.

Question 3

What is the Present Value (PV)?

Answer 3

It means the initial investment, which represents the value today of a future cash flow. So what we need to invest now in order to produce a certain amount in the future.

Question 4

How can you calculate a PV of multiple cash flows?

Answer 4

You have to add up all PV from the different cash flows to obtain the PV of multiple cash flows.
This allows investors to compare different investment opportunities or financial decisions.

Question 5

What are perpetuities?

Answer 5

Perpetuities are streams of cash payments that never end.
They continue indefinitely and are mostly fixed payments.

PV = Cash payment / r