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FM > Time Value Of Money > Flashcards

Time Value Of Money Flashcards

1
Q

What is a principal?

A

It is money deposited in an account.

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2
Q

What is simple interest?

A

They are interests rate with a fixed amount.

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3
Q

What is compound interest?

A

They are interests that are earned with interest

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4
Q

What is the effective rate of interest?

A

It represents the “t-period” and is denoted as it. It is based on the beginning of the period.

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5
Q

What is the function of the amount of interest earned?

A

I(t)=A(t)-A(t-1)

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6
Q

What is the present value (PV)?

A

It is the amount of the investment right now at time “t”

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7
Q

What is the accumulated value (AV)

A

It is the accumulated amount after an investment period.

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8
Q

What is another name for present value?

A

Discounting value.

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9
Q

What is a timing diagram?

A

It documents cash inflows and outflows with a comparison date.

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10
Q

What is a comparison date?

A

It is a standard date to discount and accumulates each cash flow.

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11
Q

What is a discount factor?

A

It is discounting for one year of interest. We use the symbol “v” as a multiplication factor.

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12
Q

What is the formula for the discount factor?

A
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13
Q

What is an effective rate of discount?

A

It is when the interest earned is based on the end of the period.

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14
Q

When does (1+i) accumulates?

A

When “v” discounts.

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15
Q

When do (1-d) discounts?

A

When 1/(1-d) accumulates.

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16
Q

What are equivalent rates?

A

They are 2 rates that measure the same growth.

17
Q

What is interest paid in affairs?

A

It is interest paid at the end of the period.

18
Q

What is interest paid in advance?

A

They are interest paid at the beginning of the period.

19
Q

What are nominal rates?

A

They are annual rates, but “in name only” because they are not effective rates.

20
Q

What is another name for compound interest?

A

Convertible interest.

21
Q

What does the accumulation function represent?

A

It is the amount a 1$ investment changes over time.

22
Q

What is the force of interest?

A

It is “i(infinity)” which represents the nominal rate as “m” approaches infinity.

23
Q

What is simple interest?

A

It creates a linear amount function.

24
Q

What is a linear amount function?

A

It produces a constant growth amount each period.

25
Q

What does a constant effective rate produce each period?

A

It produces a constant growth rate.

26
Q

What does a cash outflow for an investor represent for the bank?

A

It represents an inflow for the bank.

27
Q

What does cash inflow for an investor represent for the bank?

A

It represents an outflow for the bank.

28
Q

What is the concept of the time value of money?

A

It is the concept that 1$ received now is worth more than receiving it in the future, due to its earning potential.

29
Q

How do you create an equation of value?

A

It’s by adjusting all cash flows to a common comparison date and then equating the interest-adjusted inflows to the interest-adjusted outflows.

30
Q

What is the other name for the sum of deposits accumulated with interest?

A

It is a single lump sum.

31
Q

What is the formula for the effective rate of interest?

A
32
Q

What is the formula for the effective rate of discount?

A
33
Q

What is the formula of the accumulation function?

A
34
Q

What is the formula of the all-in-one relationship formula?

A
35
Q

What is the formula of simple interest?

A
36
Q

What is the purpose of the all-in-one relationship formula?

A

It is to show what the accumulation function can equal.

37
Q

What is the formula for the variable force of interest based on the accumulation function?

A
38
Q

What is the formula for the variable force of interest based on the accumulation of 1 from time t1 to time t2?

A
39
Q

What is the formula for the discount factor concerning “d”?

A

FM (6 decks)

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