Week 1

Question 1

What is an annuity?

Answer 1

series of cash flows for the same amount each period for a period of time (start and stop)

Question 2

What is a growing annuity?

Answer 2

Series of equal cash flows that occur after an interval of time, they grow at a constant rate
Also called an increasing annuity

Question 3

Formula for Annuity

Answer 3

PV = cashflow * ((1-(1/(1+r)^t)/r)

Question 4

PV formula

Answer 4

PV = Cashflow /(1+r)^t
Or
PV = FV/(1+r)

Question 5

Steps of TVM

Answer 5

Step 1: Convert to an effective rate

Step 2: effective rate and cash frequency must match

Question 6

APR VS EAR

Answer 6

APR: No compounding
EAR: Compounding

Question 7

How to get EAR from APR?

Answer 7

EAR = APR / n
(n = 2 for semi annual, n = 12 for monthly)

Question 8

What is cost-push inflation?

Answer 8

cost of businesses rise and it’s past onto customer (raw material prices rise) extra costs goes to customers

Question 9

What is demand inflation?

Answer 9

demand too high, they cannot keep up the supply so they charge more

Question 10

What happens when governments print money?

Answer 10

stimulate the economy to create more jobs, print more money, increase the number of notes or increase government debt. As the amount of money increases, the value starts to fall.

Question 11

What is inflation?

Answer 11

general rise in price levels

Question 12

What are three key drivers for the difference in value between the money you have today and the money you expect to receive in the future?

Answer 12

Inflation
Payments in future are not guaranteed
Lost opportunity

Question 13

What is default risk?

Answer 13

The risk that future payment will not be received

Question 14

What is interest rate?

Answer 14

rate to use to equate money received in the future (FV) with the money you have now (PV)

Question 15

Formula for FV

Answer 15

Future Value = Present Value + Interest
FV = PV + PV(r)
FV = PV(1+r)

Question 16

What is discount rate?

Answer 16

captures all three drivers of the difference between PV and FV, higher expected inflation, greater likelihood of default or higher opportunity costs, will increase the discount rate

Question 17

Two things every annuity has

Answer 17

Payment amount (c)
Number of times the payment is made (t)

Question 18

What is the growth rate?

Answer 18

rate of growth between each payment in an annuity (assumes first payment is received one period from the present)

Question 19

Formula for growing annuity

Answer 19

PV = (C/(r0g))*(1-((1+g^t)/(1+r)^t))

Question 20

What is perpetuity?

Answer 20

series of repetitive cash flows that never end (once it begins, it never ends)

Question 21

Formula for perpetuity

Answer 21

PV = CF / r

Question 22

Formula for growing perpetuity

Answer 22

PC = CF / (r-g)

Question 23

How are APR rates determined?

Answer 23

multiplying actual (effective) interest rate by the number of compounding periods in year