Topic 2- Financial Arithmetic Flashcards
Why is £100 worth more today than in 1 years time?
£100 is worth more today than in 1 years time due to risk and inflation
What is inflation?
Inflation is when you can’t buy the same items for the same value
Why do investors receive a return?
Investors receive a return as a reward (for delaying use of money) and as payment (due to uncertainty of investing)
What does time value of money enable us to do?
Time value of money enables us to compete and differentiate between cash flows form various periods
What is simple and compound interest?
Simple Interest- You don’t earn interest on interest
Compound Interest- You do warm interest on interest
What does compounding more often than annually give us?
Compounding more often than annually gives us a higher effective interest rate because you are receiving interest on interest more often
How do you compound more often than annually?
Just divide k by no. Of compounding periods m and multiple n by no. Of compounding periods m
What is the nominal interest rate?
The expressed interest rate expected by a lender or assured by a borrower
What is the effective interest rate?
The effective interest rate is the actual amount given or received
What is the present value?
Present value is the present pound value of a future amount of money
- It is the sun that we must invest today in order to obtain a future amount
What is the discount rate?
- Opportunity Cost
- the Required Return
- Cost of Capital
What is the coupon rate?
The coupon rate is the annual interest payment that the bond holder receives until the bonds maturity
What is an annuity?
A series of cash flows
- Payments in CF are equal
- equally spaced
- fixes (finite) time period
What are ordinary annuity and an annuity due?
Ordinary Annuity- occurs at end of each period
An annuity due- occurs at the start of each period
Why is a sinking fund built?
A sinking fund is built to ensure that the company will be in the position to retire the bonds (pay back the amount) at level of maturity
