The Time Value of Money

Question 1

Stream of cash

Answer 1

series of cash flows lasting several periods

Question 2

Timeline

Answer 2

linear representation of the timing of the expected cash flows

Question 3

Discounting

Answer 3

finding the equivalent value today of a future cash flow

Question 4

Perpetuity

Answer 4

a stream of equal cash flows that occur at regular intervals and last forever

Question 5

Annuity

Answer 5

a stream of N equal cash flows paid at regular intervals. It ends after a fixed number of payments i.e. loans, mortgages

Question 6

Growing perpetuity

Answer 6

stream of cash flows that occur at regular intervals and grow at a constant rate forever

Question 7

Growing annuity

Answer 7

a stream of N growing cash flows, paid at regular intervals

Question 8

Internal rate of return

Answer 8

the interest rate that equates the present value and cash flows of an investment. It sets the NPV of the cash flows equal to zero