Finance

Question 1

Time value of money (TVM)

Answer 1

The concept that an amount of money is worth more today than the exact same amount of money at some point in the future.

1. Money received now can be saved and invested to gain more money in the future
2. Any promise of future payments of cash will always carry the risk of default
3. Human nature to purchase goods and services now rather than later

(4.) Inflation

Question 2

Future Value

Answer 2

The value that a current amount will grow to at a given interest rate over a given period

Question 3

Future Value Formula

Answer 3

FV = PV x (1 + r )^n

Question 4

Compound Interest

Answer 4

The continual addition of interest to the original principal sum of a loan or deposit, often referred to as interest on interest

Question 5

Present Value

Answer 5

The current value of a future amount, calculated by discounting the future value back at a known discount or interest rate for a specified period

Question 6

Present Value Equation

Answer 6

PV = FV/(1+r)^n

Question 7

Discount Rate

Answer 7

The interest rate used to determine the present value of future cash inflows; may derive from several sources, such as stated contract rates, costs to borrow, or expected rates of return on investments

Question 8

Risk

Answer 8

the potential to lose time and money or otherwise not be able to accomplish an organization’s goals

Question 9

Return

Answer 9

the opportunity for profit

Question 10

Default Risk

Answer 10

Type of Risk

The risk that the issuer of a financial security will be unable to make payments as specified in the terms of a financial contract

Question 11

Inflation Risk

Answer 11

Type of Risk

The risk of reduced purchasing power of goods and services due to rising prices

Question 12

Diversifiable/unsystematic risk

Answer 12

Type of Risk

A risk that can be eliminated without the loss of expected return by holding a portfolio of securities

Question 13

Non-diversifiable/systematic risk

Answer 13

Type of Risk

Risk that cannot be eliminated by simply holding a portfolio of securities. What remains after a portfolio diversification has eliminated unnecessary diversifiable risk

Question 14

Political risk

Answer 14

Type of Risk

The risk of local, state, or national governments “changing the rules” and disrupting firm cash flows

Question 15

Volatility

Answer 15

Fluctuations in a security or index over time

If companies go forward with ventures that generate more profit or lose profit, then the stock will rise and fall accordingly

Question 16

Diversification

Answer 16

Holding a variety of assets in a portfolio, to manage risk

Question 17

Portfolio

Answer 17

A collection of financial investments, such as stocks, bonds, mutual funds, certificates of deposit, etc.

Question 18

Net present value

Answer 18

Considering the expected inflows AND outflows. How much is an investment worth today?

Question 19

NPV = 0

Answer 19

the PV of the inflows = PV of the outflows. There is no difference between the value of the money earned and the cost of money invested

Question 20

NPV < 0

Answer 20

the PV of the inflows is less than the PV of the outflows. The money earned from the investment is worth less than the costs.

Question 21

NPV > 0

Answer 21

the PV of the inflows is greater than the PV of the outflows. Money earned on investments is worth more today than the costs

Question 22

Warren Buffet’s Bet

Answer 22

A bet over a portfolio of 5 hedge funds on the basis net of fees, costs, and expenses. He chose the Vanguard Fund as a proxy for the S&P 500 and won in a landslide