Chapter 5 Time Value Of Money BASICS

Question 1

It is the concept that a sum of money is worth more now than the same sum will be at a future date due to its earning potential.

Answer 1

The time value of money (TVM)

Question 2

uncertainty over the future to get this return. Also defined as “a combination of the probability of an event and its consequences”.

Answer 2

Risk

Question 3

change in the price of an asset, investment or project over time. Maybe price-change or percentage.

Answer 3

Return

Question 4

Opportunity Cost

Answer 4

Inflation and Risk

Question 5

It is the cost of holding money. It is the amount charged by the lenders to the borrowers/ users of money, and is usually paid at regular intervals.

Answer 5

Interest

Question 6

it is the charging of rate r base on a principal P over T number of years. (PRT)

Answer 6

Simple Interest-

Question 7

the interest in the first compounding period is added on the principal, which will then be the basis for the interest to be computed for the next period.

Answer 7

Compound Interest

Question 8

Factors that affect Time Value of Money

Answer 8

1. Opportunity Cost
   • 2. Inflation
   • 3. Risk

Question 9

low levels of uncertainty (risk) are associated with low returns and high levels of uncertainty with high returns.

Answer 9

Risk-reward tradeoff principle

Question 10

It is a compensation for delaying consumption (of savers). Borrowers (users of funds) are willing to pay this

Answer 10

Interest Rate or Return

Question 11

It is the amount to which an investment will grow after earning interest. The future value is computed using compounding.

Answer 11

Future value(FV)

Question 12

It is the amount you have to invest today if you want to have a certain amount of cash flow in the future

Answer 12

Present value (PV)

Question 13

It is a linear representation of the timing of cash flows, it identifies the timing and amount of a stream of payments—both cash received and cash spent—along with the interest rate earned

Answer 13

Timeline

Question 14

It deals with the actual transfers of cash into or from the firm. Cash generated by the firm and paid to creditors and shareholders

Answer 14

Cash flows

Question 15

It is a horizontal line with up-arrows
that represent cash inflows (that is, cash to be received by the decision maker) and down-arrows to indicate cash expenses or outflows.

Answer 15

A cash flow timeline

Question 16

the number of times interest is computed on a certain principal in one year. Aside from annually, interest is also compounded semi-annually, quarterly, monthly and daily.

Answer 16

Compounding Frequency

Question 17

The effects of compounding strengthen as the :

Answer 17

frequency of compounding increases. …