Time Value of Money

Question 1

An interest rate can be be interpreted three ways. Name them.

Answer 1

1. Rate of return - determining equilibrium for a particular investment
2. Discount rate - calculating present value
3. Opportunity cost - cost of consuming now, rather than saving and investing

Question 2

Effective Annual Rate (EAR) Formula

Answer 2

EAR = (1 + (stated annual rate/m)^m -1

Question 3

Future Value Formula

Answer 3

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

Question 4

Present Value Formula

Answer 4

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

Question 5

Present Value of Perpetuity Formula

Answer 5

PV = PMT / I/Y

Question 6

Default risk, liquidity risk, maturity risk

Answer 6

Types of risk premium added to the nominal rate to get the required interest rate on a security

Question 7

Calculating an annuity due

Answer 7

= PV (or FV) / (or X) 1+I/Y