Week 3-Time value of money 2

Question 1

Future value of multiple cash flows

Answer 1

FVt= SUM of CFt (1+r)^T=t

Question 2

PV of multiple cash flows

Answer 2

PV0=CF1/(1+r) + CF2/(1+2)^2 + …

Question 3

What is the rule of cashflow timing?

Answer 3

• it is implicitly assumed that cash flows occur at the end of each period
• If a cash flow occurs at the beginning (1 Jan) of one particular period it is equivalent to say it occurred at the end of the previous period (31 Dec)

Question 4

What is an annuity?

Pv of an annuity formula

Answer 4

A level stream of cash flows for a fixed period of time.

Annuity PV= C*{1/r-1/r(1+r)^t

Question 5

What is a perpetuity?

Answer 5

A level of stream of cashflows forever.

Question 6

Finding the constant payment of an Annuity Formula

Answer 6

C=annuity PV/{1/r-1/r*(1+r)^t}

Question 7

Future value of annuities

Answer 7

C{(1+r)^t/r-1/r}

Question 8

Present value of perpetuities

Answer 8

=C/r

Question 9

What is EAR

Answer 9

The interest rate expressed as if it were compounded once per year, that is, what you effectively end up paying per year given the compounding period.

EAR={1+(quoted rate/m)}^m-1

Question 10

Annual percentage rate APR)

Answer 10

The harmonized interest rate that
expresses the total cost of borrowing
or investing as a percentage
interest rate.