Time Value of Money

Question 1

Annuity

Answer 1

A stream of equal cash flows that occur in equal time intervals over a given period.

Question 2

Ordinary Annuity

Answer 2

Cash flows occur at the END of each compounding period.

Question 3

Annuity Due

Answer 3

Payments or receipts occur at the beginning` of each accounting period.

Question 4

Loan Amortization

Answer 4

The process of paying off a loan with a series of periodic loan payments, whereby a portion of the outstanding loan amount is paid off or amortized, with each payment.

Question 5

Interest Rate

Answer 5

1. The rate of return required in equilibrium for a particular investment.
2. the discount rate for calculating the PV of future cash flows
3. Opportunity cost of consuming now, rather than saving and investing.

Question 6

Real Risk-Free Rate

Answer 6

A theoretical rate on a single-period loan when there is no expectation of inflation.

Question 7

Nominal Risk-free Rate

Answer 7

= real risk free rate + expected inflation rate

Question 8

3 risks of securities

Answer 8

1. Liquidity Risk
2. Default Risk
3. Maturity Risk

Question 9

Required Rate of return on a security

Answer 9

= real risk free rate + expected inflation + default risk premium + liquidity premium + maturity risk premium

Question 10

EAR

Answer 10

Effective Annual Rate

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

Question 11

Future Value formula

Answer 11

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

Question 12

Present Value formula

Answer 12

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

Question 13

Perpetuity

Answer 13

An annuity with infinite lives

Question 14

PV of Perpetuity formula

Answer 14

= PMT / I/Y