Quantitative Methods - The Time Value of Money

Question 1

the value that investors forgo by choosing a particular course of action

Answer 1

opportunity cost

Question 2

Interest rates can be thought of in three ways

Answer 2

1 - Required rate of return
2 - Discount rate
3 - Opportunity cost

Question 3

We can view an interest rate r as being composed of a real risk- free interest rate
plus a set of four premiums that are required returns or compensation for bearing
distinct types of risk

Answer 3

r = Real risk- free interest rate + Inflation premium + Default risk premium +
Liquidity premium + Maturity premium

Question 4

Effective annual rate (EAR)

Answer 4

For an 8 percent

stated annual interest rate with semiannual compounding, the EAR is 8.16 percent.

Question 5

a finite set of level sequential cash flows

Answer 5

annuity

an ordinary annuity has a first cash flow that occurs one period from now
(indexed at t = 1).

an annuity due has a first cash flow that occurs immediately (indexed at t = 0)

Question 6

perpetual annuity, or a set of level never- ending sequential
cash flows, with the first cash flow occurring one period from now.

Answer 6

perpetuity

Question 7

the idea that amounts of money indexed at the

same point in time are additive

Answer 7

cash flow additivity principle