Time value of money (2)

Question 1

share prices vs interest rates

Answer 1

inverse relationship

Question 2

asset

Answer 2

sequence of cashflows - every real and financial asset gives rise to a future cashflow

Question 3

present value

Answer 3

earlier money on a time line

Question 4

future value

Answer 4

later money on a timeline

Question 5

interest rate

Answer 5

‘exchange rate between earlier money and later money’

Question 6

compounding

Answer 6

interest on interest

Question 7

discounting

Answer 7

finding the present value of a future amount

Question 8

the longer the time period in discounting

Answer 8

the lower the present value

Question 9

the higher the interest rate in discounting

Answer 9

the smaller the present value `

Question 10

zero-coupon bonds

Answer 10

discount bonds e.g. treasury bills, issued in primary markets, useful for complex instrument pricing

Question 11

annuity

Answer 11

finite series of equal payments that occur at regular intervals

Question 12

ordinary annuity

Answer 12

if the first payment occurs at end of period

Question 13

annuity due

Answer 13

first payment occurs at beginning of period

Question 14

perpetuity

Answer 14

infinite series of equal payments or payments growing at g% occurring at regular intervals (growth rate can’t exceed loss of capital)

Question 15

issues with annuities

Answer 15

different discount factors between people - different values for future moeny, one incentive to trade, risk sharing

different discount factors across times - sum of different discount bonds

Question 16

origin of yield

Answer 16

market determines risky interest rate
policy makers determine risk-free interest rate

Question 17

value of cashflow depends on

Answer 17

timing of cashflow (time-value of money)
associated risk of the cashflow