Wk4 Time Value of Money

Question 1

What determines Interest Rates?

Answer 1

• Rate of Inflation
• Central Bank

Question 2

What are the two main types of interest?

Answer 2

• Simple
• Compound

Question 3

What is Compounding?

Answer 3

• Process of calculating interest ‘accrued’ up to a given time and adding it to the original principle/ compound.
• The interest for the next ‘compounding’ is then calculated on the total compound value.

Question 4

What does AER/ APR stand for?

Answer 4

Annual Equivalent/ Percentage Rate

Question 5

How can a given interest rate be converted to APR?

Answer 5

APR = (1+IR as a decimal)^no. of periods in a year -1

Question 6

What should the APR be on a credit card which charges 1.3% every month on the outstanding balance?

Answer 6

APR = (1+0.013)^12 - 1
= 0.167651
= 16.76%

Question 7

What is the ‘real interest rate’

Answer 7

Interest rate excluding the influence of inflation

Question 8

What is the Current Yield?

Answer 8

Indicated Interest charged for a period of time starting now

Question 9

What is the Forward Rate?

Answer 9

Yield for a future time period available now

Question 10

What is Interest Rate Parity?

Answer 10

When the current and forward rates must generate the same yield in a given period.

Question 11

What are the types of cash flow?

Answer 11

• Single Cash Flow
• Multiple Cash Flows
• Unequal Cash Flows

Question 12

What is Single Cash Flow?

Answer 12

Only one transaction

Question 13

What is Multiple Cash Flow?

Answer 13

Amount received or paid many times over different periods.
- Unequal cash flows
- Annuity
- Perpetuity
- Growing Perpetuity

Question 14

What is Unequal Cash Flow?

Answer 14

When a different amount of cash is received/ paid in different periods.