Investing DecisionsTime Value of Money Concepts +Loan Amortization

Question 1

Simple Intrest

Answer 1

Amount of intrest earned on principal amount (amount borrowed/saved)

I = Prt

Question 2

Time Value of Money (TVM) is affected by

Answer 2

Inflation - rise in prices
Risk - money now or invest and have money later (rates not favourable)
Interest - importance of having money now to invest Vs money at a later date

Question 3

Types of Intrest (regarding time value of money)

Answer 3

Compounding - a dollar earned today will be worth more tomorrow
Discounting - a dollar earned tomorrow is worth less today

Question 4

Compound intrest

Answer 4

the interest that is earned/charged on both the principal amount and on the accrued interest that has been previously earned or charged.

FV = PV(1=i)n

Question 5

Tools for solving TMV

Answer 5

1. Formulas
2. Interest tables
3. Financial calculators and spreadsheets
4. Time-line illustrations

Question 6

Different Types of Interest Tables

Answer 6

Single Sum - Compound and Discount (budgeting)

Annuity - Compound and Discount (budgeting)

Question 7

Rule of ‘72’

Answer 7

a simplified way to determine how long an investment will take to double, given a fixed annual rate of interest. By dividing72by the annual rate of return, investors can get a rough estimate of how many years it will take for the initial investment to duplicate itself.

Question 7

Rule of ‘72’

Answer 7

a simplified way to determine how long an investment will take to double, given a fixed annual rate of interest. By dividing72by the annual rate of return.

Question 8

Annuities

Answer 8

A series of equal payments (or receipts) occurring over a specified number of equal periods

Ordinary annuity
Payments (or receipts) at the END of each period

Annuity due
Payments (or receipts occur at the BEGINNING of each period

eg: 
Loans Payments
Pension Payments
Retirement savings
Insurance Payments