Finance Lecture 2 Time Value of Money

Question 1

What is the concpet of the time value of money?

Answer 1

Time allows to postpone consumption and earn interest on the money i.e as a bank deposit.

Question 2

What is the formula for simple interest?

Answer 2

Question 3

What is the formula for Compound Interest?

Answer 3

Question 4

What is the Formula for ROI?

Answer 4

Question 5

What different kinds of cash flows exist?

Answer 5

1. Ordinary annuity, equal payments of same size
2. Uneven Annuity, uneven CF over time
3. Lump Sum, a singe payment at a point in time

Question 6

Give the future value formulas

Answer 6

Question 7

Give the present value formulas:

Answer 7

Question 8

Give the present value formula of a perpetuity

Answer 8

Question 9

How can you group cash flows to discount the more easlily?

Answer 9

Question 10

What needs to be adjusted and looked out for in discounting?

Answer 10

Adjust the time periods i.e. intra year compounding and adjust the interest rate i.e annually , semi annualy

Question 11

what is the difference between effective vs periodic yield and what is the formula?

Answer 11

Question 12

What are the steps in Loan Armotization?

Answer 12

1. Determine the annual payments by calculating the PV of annual payments by dividing 1000 by 2.4869 = 402 this is your annual payment
2. Interest payment will be calculated based ion the beginning balance of each year.
3. Repayment plus Principal minus initial loan will equal the end balance

Question 13

Answer 13

Question 14

What is an interesting phenomenon in Loan Armotization?

Answer 14

As time increases, interest payments become smaller, while principal payments increase.

Question 15

What is the definition of the Annual Percentage Rate?

Answer 15

Describes the interest rate for a whole year (annualized), rather than just a monthly fee/rate, as applied on a loan, mortgage loan, credit card, etc. It is a finance charge expressed as an annual rate.