lesson 2: the time value of money Flashcards
what do the time value of money techniques enable us to do?
enable us to compare dollars received or paid out in different time periods
why is it important to compare dollars received or paid out in different time periods?
Sound financial decisions are made with considerations of not only the size, but also the timing of cash flows
“a dollar today is not the same as a dollar tomorrow.”
why is “a dollar today is not the same as a dollar tomorrow” a true statement?
everything else being equal, today’s dollar can be invested to earn interest and grow to a larger sum in the future
what are the main time value formulas used for the course?
Present Value (PV)
Future Value (FV)
Present Value of an Annuity (PVA)
Future Value of an Annuity (FVA)
what are the different rates of return
nominal rate
effective annual rate
nominal rate
also known as “in name only” because it has not been adjusted for inflation
Quoted Rate
Stated Rate
Observed Rate
Annual Percentage Rate (APR)
effective anual rate (EAR)
the interest rate compounded once per year
when we talk about the interest rate we are talking about the nominal rate or the effective annual rate (EAR)?on
the nominal rate
how is the interest rate or nominal rate always written?
on a per annum basis
the present value of money
the current value that a future amount of money is worth
what are the variables of the present value of money calculations?
interest rate
number of periods or compounds
future value
payment
the future value of money
The future value is the value that a current amount of money will have at a specified date in the future
what are the variables of the present value of money calculations?
interest rate
number of periods or compounds
present value
payment
