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Module 3: Financial Mathematics > Concepts (CH 1): Time Value of Money > Flashcards

Concepts (CH 1): Time Value of Money Flashcards

1
Q

T or F. The Concept of compound interest or interest on interest is deeply embedded
in TVM procedures

A

T

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2
Q

The growth in the value of the investment from period to period that reflects not only the interest earned but also the interest earned on the previous period’s interest
earnings

A

compound interest

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2
Q

value of an investment’s cash flows as a result of the effects of compound interest (projects the cash flow forward)

A

future value

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2
Q

why is measuring PV and FV important?

A
  • it is useful when comparing investment alternatives
  • the value of the investment’s cash flow must be measured at some common
  • point in time
  • at the end of the investment
    horizon (FV) or
  • at the beginning of the investment
    horizon (PV)
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2
Q

brings the cash flows from an
investment back to the beginning of the investment’s life based on an
the appropriate compound rate of return

A

present value

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2
Q

a diagram of the cash flows associated
with a TVM problem

A

TIME LINES

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3
Q

a cash flow that occurs in the present/today is at ________; cash outflow/payments has _________; and the cash inflows/receipts has ____________.

A

time zero; negative
sign; positive sign

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3
Q

measure of the time value of money, though risk differences in financial securities cause differences in equilibrium interest rates

A

requird rates of return, discount rates, or opportunity costs

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3
Q

required rate of return for a particular investment

A

equilibrium interest rates

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3
Q
  • theoretical rate on a single-period loan that has no expectation of inflation in it
  • refers to an investor’s increase in purchasing power (after adjusting for inflation)
A

real risk-free rate

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4
Q

what are the different types of risk

A

default risk, liquidity risk, mturity risk

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5
Q

default risk

A

risk that a borrower will not make the promised payments in a timely manner

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6
Q

liquidity risk

A

risk of receiving less than fair value for an investment if it must be sold for cash quickly

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7
Q

t or f.

A
  • prices of long-term bonds are more volatile than those shorter-term bonds
  • longest maturity bonds have more maturity risk than shorter-term bonds and require a maturity risk premium
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8
Q

represents annual rate of return actually being earned after adjustments have been made for different compounding periods

A

Effective annual rate (EAR)

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9
Q

Future Value is the amount to which a __________ will __________ when it is placed in an account paying compound interest

A

current deposit; grow over time

10
Q

today’s value of a cash flow that is to be received in the future

A

Present value of single sum

11
Q

stream of equal cash flows that occurs at equal intervals over a given period

A

annuities

12
Q

2 types of annuities

A

ordinary annuities & annuity due

13
Q

most common type of annuity
- characterized by cash flows that occur
at the end of each compounding period

A

ordinary annuities

14
Q

payments occur at the beginning of each period

A

annuity due

15
Q

financial instrument that pays a fixed amount of money at set intervals over an infinite period of time

A

perpetuity

16
Q

process of paying off a loan with a series of periodic loan payment, whereby a portion of the outstanding loan amount is paid off with each payment

A

loan amortization

17
Q

there are many TVM applications where it is necessary to determine the size of the deposit that must be made over a specified period in order to meet a future liability

what are these applications? m

A
  1. setting up a funding program for
    future college tuition
  2. the funding of a retirement program.
18
Q

t or f. the sum of the present values of the cash flows is the future value of the series

A

f. the sum of the present values of the cash flows is the present value of the series

19
Q

t or f. the product of the future values (at some future time = n) of a series of cash flows is the future value of that series of cash flows

A

f. the product of the future values (at some future time = n) of a series of cash flows is the future value of that series of cash flows

20
Q

refers to the fact that present value of any stream of cash flows equals the sum of the present values of the cash flows

A

cash flow additivity principle

Module 3: Financial Mathematics (3 decks)

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