Topic 2 - Basic Mathematics of Finance Flashcards
1
Q
Time Value of Money
A
- Money received today is worth more than the same money in the future because you can invest money today and earn interest on it.
- It is referred to as an opportunity cost.
2
Q
Future Value
A
- The amount that, if invested today, it will grow to when the interest earned is taken into account.
3
Q
Future Value equation
A
FVn = PV ( 1 + r )^n
n = number of years
r = annual interest rate
4
Q
Present Value equation
A
Rearrange the FV equation
Present Value = Future Value / ( 1 + r )^n
5
Q
What is a console?
A
A financial instrument that pays a fixed amount each year forever.
6
Q
Formula to price a consol
A
A = c / r
7
Q
What is a term annuity?
A
A guaranteed payment or form of income for a fixed period of time.
8
Q
A
