Unit 4, module 8- Time Value of money Flashcards
Time Value of money
concept that money is worth more today than it is in the future
interest rate
the amount that the value of the money changes after one year
discounting
the process of determining how much a future cash flow is worth today
Single period investments
you only need to know two of the three variables PV, FV, and i. The number of periods is implied as one since it is a single-period.
multi-period investment
any investment for more than one year
single period formula for future Value
FV = PV (1+ i)
single period formula for Present Value
PV= FV/(1+ i)
compound interest
Interest is paid at the total amount in the account, which may include interest earned in previous periods.
annuties
payments of a fixed amount at set frequency
ordinary annuity
payments at the end of period
annuity due
payments at the beginning of a period
perpetuity
value = payment / rate
growing perpetuity
payment 1 / interest- growth rate
variance
a statistical concept describing the range around expected return within which an investment return can be reasonably expected to fall.
-time horizon and variance acceptance are positively correlated
unsystematic risk and portfolio diversification
- returns among multiple asset classes tend not to move in the same direction at the same time
- by creating a diversified portfolio, an investor can reduce risk. (volatility)
