Topic 2 - Time value of money

Question 1

Why count?

Answer 1

• Darwinian point of view: the ability to count is a factor that increases the chances of the species to survive
• counting in itself does not represent a moral issue, only the judgements made based on the numbers have a philosophical and psychological relevance

Question 2

What is discounting?

Answer 2

taking away the potential interest of the future value, and therefore find out the present value

Question 3

Exponential

Answer 3

taking the value you have, times the interest, times itself as many time as of the years you have the money in the bank

Question 4

Intertemporal choice

Answer 4

a choice you have to make between the outcome now compared to in the future

Question 5

Interest rate

Answer 5

Interest rate is the price of money. Will help you calculate the difference of a dollar today vs a dollar in the future. The price that will help you compare different sums of money given to you at a different point of time.

Question 6

Compound interest

Answer 6

Interest of the interest

Question 7

Growth of interest rate

Answer 7

Growing in an exponential rate

Question 8

Hyperbolic discounting

Answer 8

refers to the tendency for people to increasingly choose a smaller-sooner reward over a larger-later reward as the delay occurs sooner rather than later in time

Question 9

Present value (PV)

Answer 9

in order to compare different future cash flows, we need to compare them at the same point of time: today.

in order to calculate the PV, you divide the future cash flows by the cumulative interest rate