Financial Mathematics

Question 1

Time value of money

Answer 1

• The difference in value b/w money today + money in the future
• Observation that 2 cash flows @ 2 different pts in time have different values

In order to convert cash flows it is necessary to convert all values to the same units by moving them to a common point in time

Question 2

Compounding assumption

Answer 2

• Interest always kept in account

- Ending value in a given p. becomes the starting principal used to compute interest payment

Question 3

Present value

Answer 3

Initial value of an investment

Question 4

n-period interest rate factor

Answer 4

(1 + r)^n

Question 5

Future value

Answer 5

The value of the cash flow moved forward in time

Question 6

Compounding

Answer 6

Calculating the equivalent future value of a cash flow, by multiplying the cash flow’s present value by interest rate factors associated w intervening periods

Question 7

Discounting

Answer 7

to calculate the present value of a cash flow, multiply the future cash flow by a discount factor or, equivalently, divide by appropriate interest rate factor