Chapter #3 Flashcards
What are lump sums?
Lump sums are one time cash flows
What are PV/FVs?
- PVs are earlier values
- FVs are later values
Where on a timeline are PV/FVs?
- PVs are leftward on a timeline
- FVs are rightward on a timeline
What do FVs represent?
FVs represent the amount that an earlier amount will grow into
What do PVs represent?
PVs represent what you need to invest earlier to have it grow into a specified later amount
What is discounting/compounding?
- Discounting is used to find PV
- Compounding is used to find FV
What is discounted from FV to find PV?
The interest part
What type of interest is earned every period only on the original starting amount?
Simple Interest
What kind of interest does a debtor prefer?
Simple interest because it adds less to what they owe
What kind of interest does a depositor prefer?
Compund interest because it adds more to what they earn
What are the four variables in the basic TVM Formulas?
- PV
- FV
- r
- n
In which equation do the right hand side variables represent the 3 key factors in determining stock prices?
-PV Formula (FV future cash flows, r risk, n timing of cash flows)
What is the relationship between FV and r?
They are directly related
What is the rule of 72?
Says that the number of years it would take an investment to double is approximately equal to 72 divided by the annual interest rate
What can FV show us?
- Determines the attractiveness of alternative investments
- See the effect of inflation
