Topic 2: The Time Value Of Money

Question 1

Future value (Single period)

Answer 1

The amount an investment is worth after one or more periods

Question 2

Future value general formula
(Single Period)

Answer 2

FV = V0 (1 + r)

Where:
FV = Future Value (value at time t = 1)
V0 = Value of original investment
r = Interest rate

Question 3

Future value formula
(multiple periods)

Answer 3

FV = Vt = V0 (1 + r)^t

Where:
FV = Future Value or Vt (Value at time t)
V0 = Value of original investment
r = interest rate
t = time in years

Question 4

Compounding
(Interest on Interest)

Answer 4

The process of growing interest on an investment over time to earn more interest.

Question 5

Simple Interest

Answer 5

Interest earned only on the original principal amount invested.

Question 6

Compound Interest

Answer 6

Interest earned on both the initial principal and the reinvested from prior periods.

Simple interest + Interest on Interest

Question 7

Present Value

Answer 7

The current value of one or more future cash flows discounted at the appropriate discount rate.

Question 8

Present value formula

Answer 8

V0 = V1 / (1 + r)

Where:
V0 = Present Value
V1 = Future Value
r = discount rate

PV = V0 = Vt / ((1 = r)^t)
Vt = future cash value at time t
V0 = present value
r = interest or discount rate

Question 9

Discounting

Answer 9

Calculating the present value of one or more future cash flows