Time value of money, present values and future values

Question 1

what is interest?

Answer 1

The amount paid/earned on loans or deposits
Borrower pays a funding cost
Lender/investor earns a return or yeild

Question 2

What is Simple Interest Rate?

Answer 2

Normally on short-term loans or deposits

Question 3

Bank charges commercial rates; how is this calculated?

Answer 3

bank base rate + a spread which is dependent on the credit quality of the borrower

Question 4

A wide spread indicates that the credit quality is a) low or b) high

Answer 4

a) lower quality

Question 5

A narrow Spread indicates that the quality is….

Answer 5

High

Question 6

Question:
My overdraft for September was £100 for 10 days and £250 for 20 days. My bank is charging the base rate of 7.5% plus a spread of 5%. How much did I pay in overdraft interest for September?

Answer 6

Commercial Rate= Base Rate + spread

7.5% + 5% = 12.5%

£100 * 10/365 (all interest rates are annual) * 12.5% = 0.34

£250* 20/365*12.5% = 1.71

Total overdraft paid= £2.05

Question 7

What is compound interest?

Answer 7

Relates to long term loans/deposits

Question 8

What is different about compound interest?

Answer 8

it is reinvested and interest is earned on interest

Question 9

example of compound interest:

Answer 9

£100 deposit, 10% p.a 2 years deposit

YEAR 1: £100*10%= £10 add that to principle = £100+£10= £110 (use this figure at the start of year 2)

YEAR 2: £110*10%=£11+£110=£121

Principle increases with time as earning interest on interest

Question 10

what is the compound formula

Answer 10

F=P(1 + i)^n

Question 11

compound formula:

what does F stand for in the formula?

Answer 11

F=Future Value

Question 12

Compound formula:

the principle is denoted by what letter?

Answer 12

P

Question 13

Compound formula

interest rate is denoted by the letter i and term is denoted by what letter?

Answer 13

n

Question 14

what is the present value formula? DISCOUNTING

Answer 14

P=F/(1+i)^n

Question 15

TIME VALUE OF MONEY

Answer 15

Present values and future values demonstrate the time value of money

Question 16

£1 today is worth more than £1 tomorrow

known as the TIME…..

Answer 16

Time Value of Money

Question 17

Time value of money:

All money amounts should be discounted to ________ value before they are compared, added or subtracted.

Answer 17

Present value

Question 18

Present value should be discounted from

Answer 18

t1 (sometime in the future) -> t0 (today)

Question 19

The future values should be compounded

Answer 19

t0 -> t1….

Question 20

Compounding and discounting are what?

Answer 20

OPPOSITES

Question 21

in finance we always talk in terms of present value

Question 22

Period rates formula; where interest is not paid annually

Answer 22

P=F/(1+i/t)^n

Question 23

Period Rates:

P=F/(1+i/t)^n

Answer 23

n= number of compounding periods
i= per annum rate
t= compounding periods

Question 24

ANNUITIES

Question 25

Annuities:

a sequence of equal cashflows at regular intervals for a

Answer 25

specified period of time

Question 26

a sequence of equal cashflows at regular intervals for a specified period of time
per annum 
£100
for 10 years
'equal cashflow'
'regular intervals'
specified period of time'
match them up

Answer 26

£100 equal cashflow
per annum; regular intervals
10 years; specified period

Question 27

Annuity formula

Answer 27

P=A(1/r - 1/r((1+r)^n)

Question 28

A= regular cashflow/ annuity
r= interest rate
n=number of years
p=?

Answer 28

present value