Time Value of Money

Question 1

What does IRR stand for?

Answer 1

Internal Rate of Return

Question 2

If you invest $100 and get $120 in a year, what is the IRR of this investment?

Answer 2

20%

Question 3

What is the assumed shape of the yield curve for the IRR formula?

Answer 3

Flat: the returns at all times are the same

Question 4

What is the most common shape of a yield curve?

Answer 4

Upward Sloping

Question 5

What does it mean to have an upward sloping yield curve?

Answer 5

Interest rates further out (in time) are higher than interest rates closer to the present.

Question 6

A dip in the yield curve imply what is expected at that time?

Answer 6

There is an expected economic slowdown at the time of the dip

Question 7

Does the yield curve over, under, or correctly predict the change in magnitude economic activity at a dip?

Answer 7

Over exaggerate

Question 8

What is the payment equation?

Answer 8

Loan Amt = Payment * Annuity Discount Factor

PV = C*ADF