Time Value of Money

Question 1

Interest Rate

Answer 1

Interpreted as the rate of return required in equilibrium for a particular investment, the discount rate for calculating the PV of future cash flows or the opportunity cost of consuming now rather than saving/investing

Question 2

Real-Risk Free Rate

Answer 2

Theoretical rate on a single-period loan when there is no expectation of inflation.
Nominal rate = real risk-free rate + expected inflation rate

Question 3

Required Rate of Return on Security

Answer 3

Real risk-free rate + expected inflation +default risk premium +liquidity premium + maturity risk premium

Question 4

Effective Annual Rate (EAR), m periods

Answer 4

(1 + (stated annual rate/m))(^m)-1

Question 5

Non-annual time value of money problems, Compounding =

Answer 5

divide that stated annual interest rate by the number of compounding periods per year, m, and multiply by the number of compounding periods per year

Question 6

Future value

Answer 6

FV = PV(1 + I/Y)^N

Question 7

Present Value

Answer 7

PV = FV/ ((1 + I/Y)^N)

Question 8

Present Value of Perpetuity

Answer 8

PVp = PMT / (I/Y)