TVM Flashcards
What is TVM? What does it describe?
Time Value of Money. A value of a dollar today is not the same as the value of a dollar 1yr. from now. Due to inflation and consumer preference.
It describes the relationship between value of a current dollar vs. the value of a future dollar.
Why do we care about TVM?
Because finance is about the future.
The current value of any asset is the asset’s FUTURE cash flow DISCOUNTED to today
Describe future and discounted values in regards to finance
- If finance is about the future - we need to be able to project and calculate FUTURE values
- If the value of assets are future cash flows discounted to today - we need to DISCOUNT future values to today
> What we mean by NPV (net present value)
What is TVM expressed as?
As a discount rate. Includes a variety of time related variables:
- Inflation, consumer preferences, risk
What is the biggest capital market in the world
Bonds
What is a bond yield?
The return an investor expects to receive each year over its term to maturity
List interchangeable terms for
“Discount rate”
- Interest Rate
- Cost of Equity rates
How are discount rates used?
They convert future expected values, often cash flows, into a value today. OR VICE VERSA *
How do you move a cash flow forward in time?
Compound it - MULTIPLY
How do you move a cash flow back in time?
Discount it - DIVIDE
What is PV set at? Also, year is “time 1”
PV = Time 0.
“Time 1” is one year from today. It is the end of the first year, and the beginning of the second year.
What is PV?
A VALUE. Not a cash amount. $95 PV is not $95 of cash, but the value of $100 cash received 1 yr from now.
What is the formula for PV?
PV = Cashflow / (1 + discount rate) ^ #ofPeriods
What is the formula for FV if asking at X Year?
** must find PV first
FV = PV * (1 + interest rate)^#ofPeriods
How do you find missing cashflow (for PV) when given sum of total cashflows and sum of total PV?
Sum of Total PV - Sum of Total PV minus missing CF = PV of missing cashflow
What is the formula for NPV in excel?
Discount, then sum of all cash flows
If asking for PV value (how much you would have to invest today) to have a certain amount of $ in the next years, what would you replace cashflow with?
The future value
Net Present Value (NPV) formula?
Sum of all present values
What is the formula for FV if its asking across multiple periods?
MANUAL
FV = PV * (1 + $interest rate)^($Highest period - Current period)
EXCEL
Subtracting periods also apply. Also, do =-FV, or else number will be negative.
What is the rearranged formula for CF when given PV?
= PV((1+discountRate)^period)
Whats the difference between Interest Rates and Cost of Equity
Interest Rates are for bond cash flows, and cost of equity is for equities
What are interchangeable terms of equities (for discount rates)
- Cost of equity
- Required rate of return for equity
- Expected rate of return
