Chapter 5 - Time Value of Money

Question 1

Future value def

Answer 1

the amount to which an investment will grow after earning interest

Question 2

2 types of interest

Answer 2

simples interest: interest earned only on the original investment

compounded interest: interest earned on interest
(always assume compounded except if said)

Question 3

Future value relationship with interest and time

Answer 3

As r increases, FV increases
As t increases, FV increases

Question 4

discount rate def

Answer 4

interest rate used to computer present values of future cashflows

Question 5

annuity def

Answer 5

Equally spaced and level stream of cash flows

Question 6

perpetuity def

Answer 6

Stream of level cash payments that never ends

Question 7

annuity due

Answer 7

level stream of cash flows starting immediatly

Question 8

growing annuity def

Answer 8

a finite stream of cash flows growing

Question 9

inflation def

Answer 9

rate at which prices as a whole are increasing

Question 10

nominal interest rate def

Answer 10

rate at which money invested grows

Question 11

real interest rate def

Answer 11

rate at which the purchasing power of an investment increases

Question 12

Effective annual interest rate def (EAR)

Answer 12

interest rate that is annualized using compounded interest

Question 14

Annual percentage rate (APR) def

Answer 14

Interest rate that is annualized using simple interest

Question 15

present value def

Answer 15

the amount you would need to invest today to create that future cash payment