Quantitative Methods - Time Value of Money Flashcards
What is NPV?
the difference between the present value of cash inflows and the present value of cash outflows
What is IRR?
A measure for the profitability/return on investments. It is the discount rate for which the NPV of an investment is equal to zero
What is Required Rate of Return?
The minimum acceptable annual rate of return sought by an investor
What is a Discount Rate?
The interest rate used to determine the present value of future cash flows
What are interest rates?
The proportion of the amount lent, borrowed or deposited, expressed as a percentage
What factors (premiums) influence what interest rate an investment should pay?
Nominal Risk Free Rate (real risk free rate and inflation)
Default risk premium
Maturity premium
Liquidity premium
What is EAR?
Effective Annual Rate. The actual interest earned on an asset over a year, expressed as a percentage
How do you calculate EAR?
r = ((1 + i/n)^n)-1
What is the PV formula?
PV = FV(1+r)^n
What is PV?
The current value of a future cash inflow or outflow, taking into consideration the time value of money
What is FV?
The value of an asset or cash flow at a specific date (in the future)
What is the FV formula?
FV=PV(1+r)^n
What is the difference Between EAR and stated interest rate?
EAR is the rate expressed for a 1 year period, stated interest rate can be for any period length.
What is an annuity, and what three main aspects make it an annuity?
An annuity is a series of payments made at equal intervals.
- Payments at equal intervals
- Same (equal) payments
3.
What is the difference between an ordinary annuity and an annuity due?
Ordinary: each payment belongs to the period preceding its date
Due: each payment belongs to the period following its date
