Time Value of Money

Question 1

What is the concept behind compound interest?

Answer 1

it’s basically interest earned on interest

Question 2

What are annuities

Answer 2

a simplified version of multiple cash flows
equally spaced and equally sized
either an inflow or an outflow

Question 3

What are perpetuities

Answer 3

An annuity with payment stream that lasts forever

Question 4

Explain the relationship between nominal interest rate and real interest rate

Answer 4

Nominal interest rate is the rate at which money invested grows. Need to convert APR into EAR

Real interest rate is the rate at which the purchasing power of an investment increases

Question 5

What is the Future Value equation?

Answer 5

FV = PV x (1+r)^t

Question 6

What is the Present Value equation

Answer 6

PV = FV/[(1+r)^t]

FV x PVIF

Question 7

How do you find the present value of a perpetuity

Answer 7

PV = annuity / interest rate
PV = C/r

Question 8

How do you find the present value of an annuity

Answer 8

C x PVIFA

Question 9

How do you find the future value of annuities

Answer 9

C x FVIFA