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Finance > CH 4 > Flashcards

CH 4 Flashcards

1
Q

Future Value ()

A

compounding Process

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2
Q

Present value ()

A

discounting process

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3
Q

T/F the time value of money is one of the most important topics in finance

A

True

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4
Q

Why finance is obsessed with time

A

over time interest can be earned

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5
Q

Future value

A

the amount of money an investment will grow to over some time period while earning a given interest rate

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6
Q

Future value interest factor

A

the future value of one dollar invested at a given interest rate over a specified time period ( exchange rate, transformation rate, conversion rate)

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7
Q

Compounding process

A

the process of accumulating interest on an investment over time to earn more interest

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8
Q

Simple interest

A

earned only on the original principal

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9
Q

interest on interest

A

earned on reinvestment of previous interest payments

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10
Q

Total interest (compound)

A

interest earned on principal (simple) and interest on interest

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11
Q

Fv equation

A

FV=PV+TI=PV+SI+IOI

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12
Q

FL rule 1

A

Know your financial statements

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13
Q

FL rule 2

A

Take advantage of the power of the compounding process by saving and investing

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14
Q

FL rule 3

A

Saving and investing are two different processes

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15
Q

Compounding frequency

A

refers to the frequency with which interest is added to the principal

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16
Q

Discrete compounding

A

interest is added to the account a discrete number of times per year, compounding occurs times per year

17
Q

Continuous compounding

A

occurs continuously, that is, an infinite number of times per year, where the base of the natural logarithmic unction is

18
Q

Present value

A

the value in todays dollars of a sum of money to be received in the future or the current value of a future payment ( inverse compounding)

19
Q

Discounting process

A

Calculating the present value of a future sum of money, reverse of the compounding process (aka discounted cash flow analysis DCF)

20
Q

Discount rate

A

the rate used to calculate the present value of future cash flows

21
Q

PV interest factor

A

the present value of one dollar to be received periods later when the discount rate is

22
Q

Discounting frequency

A

refers to the frequency with which (number of discounting periods in a year) a future cash flow is discounted to find its present value

23
Q

Discrete compounding

A

interest is added to the account a discrete number of times, times, per year., compounding occurs times per years

24
Q

Effective annual rate (EAR)

A

the rate effectively earned on an investment, after accounting for the effect of compounding in a given time period

25
Q

The APR assumes that….

A

the number of compounding periods in a year is 1

26
Q
A

Finance (8 decks)

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