Lecture 2

Question 1

Why is dollar today worth more than a dollar tomorrow

Answer 1

Money today can have intrest on it thus making it worth more

Question 2

Intrest rate

Answer 2

As the measure of time value of money

Question 3

Rate of return

Answer 3

What you expect to receive in future for your investment

Question 4

Discount rate

Answer 4

Rate at which you sacrifice current consumption in exchange for future consumption

Question 5

What is the future value of cash flow

Answer 5

FV = C * (1+r)^t

Question 6

What happens when funds are longer invested

Answer 6

Greater compound intrest

Question 7

Annuity

Answer 7

A stream of cash flows that occur yearly over given period

Question 8

FV annuity =

Answer 8

C/r * ((1+r)^t - 1)

Question 9

Present value of cash flow

Answer 9

PV= C / (1+r)^t

Question 10

What is the discount factor

Answer 10

1 / (1+r)^t

Question 11

PV annuity

Answer 11

C/r * ( 1- 1 / (1+r)^t)

Question 12

Net present value (NPV) is ..

Answer 12

The difference between the present value of its benefits and the required investment

Question 13

NPV 0 =

Answer 13

C 0 + PV 0

Question 14

NPV rule

Answer 14

Accept investments with positive NPVs

Question 15

Perpetuity

Answer 15

A stream of equal cash flow that occurs forever

Question 16

PV perpetuity=

Answer 16

C / r

Question 17

PV growing annuity =

Answer 17

C / (r-g) * ( 1 - (1+g/1+r)^t)

Question 18

PV growing perpetuity =

Answer 18

C1/ r-g

Or

C0 * (1+g)/r-g

Question 19

Effective annual rate EAR

Answer 19

Annual rate of return actually earned after adjustments have been made for different compounding periods

Question 20

Annual percentage rate (apr)

Answer 20

Annualised interest rate without compounding

Question 21

EAR =

Answer 21

(1+ periodic rate)^m - 1

M = number of compounding periods

Question 22

To move cash forward you must …

Answer 22

Compound it

Question 23

to move cash backwards you must ….

Answer 23

Discount it

Question 24

When can values be added or subtracted

Answer 24

Values at the same point