Exam 2

Question 1

The current value of future cash flows discounted at the appropriate discount rate.
Value at t=0 on a time line

Answer 1

Present Value (PV)

Question 2

The amount an investment is worth after one or more periods.
“Later” money on a time line

Answer 2

Future Value (FV)

Question 3

-Discount rate
-Cost of capital
-Opportunity cost of capital
-Required return

Answer 3

Interest rate (I)

Question 4

When we earn (or pay) interest on interest?

Answer 4

compound interest

Question 5

For a given interest rate:
-The longer the time period, the high the future value.

Answer 5

FV: Important Relationship 1

Question 6

For a given time period:
-The higher the interest rate, the larger the future value.

Answer 6

FV: Important Relationship 2