Flashcards in Economics Deck (12):

1

## future value

###
indicates what an amount invested today at a given rate will be worth at some period in the future.

the future value of a dollar invested today depends on the (1) rate of return it earns and (2) number of years over which it is invested

2

## present value

### value today of the future cash flows of an investment discounted at a specified interest rate to determine the present worth of those future cash flows; a dollar in hand is worth more than a dollar in the future which is a function of the time elapsed and the rate of interest earned

3

## on exam: TIPS CPI question

### ask Beau

4

## rule of 72

### determines the number of years it takes for an investment to double in value assuming compounded earnings. For example, an investment of $2,000 earning 6% will double in 12 years (72 / 6 = 12)

5

## NPV

### the difference between an investment's PV and its cost. A positive NPV of $10 means an investment that cost $100 must have a discounted PV of $110 for an NPV of $10. It is expressed in dollar amounts and not a rate of return

6

## IRR

###
the discount rate that makes the future value of an investment equal to its PV. Takes into consideration the time value of money. IRR is not practical for common stock due to uneven cash flow and no maturity date and price

If an investor requires an investment return of 10% and the IRR for a proposed investment is 12%, the investor will view it as attractive.

7

## most important points for NPV & IRR

###
- the IRR is the method of computing long term returns that takes into consideration TIME VALUE of money

- the YTM of a bond reflects its IRR

- the investment is a good one if it has a positive NPV

- NPV is more important than IRR

8

## most important points for NPV & IRR

###
- the IRR is the method of computing long term returns that takes into consideration TIME VALUE of money

- the YTM of a bond reflects its IRR

- the investment is a good one if it has a positive NPV

- NPV is more important than IRR

9

## standard deviation

### measure of the volatility of an investment's projected returns, computed by using historical performance data. the higher the SD, the larger the security's returns are expected to deviate from its average return, and hence the greater the risk

10

## On exam: 12b-1 fee

### A 12b-1 fee is an annual marketing or distribution fee on a mutual fund. The 12b-1 fee is considered to be an operational expense and, as such, is included in a fund's expense ratio

11

## diff between SD and beta

### beta is a volatility measure of a security compared with the overall market, measuring only systematic (market) risk. SD is a volatility measure of a security compared with its expected performance and includes both systematic and unsystematic risk aka the total risk of a security or portfolio

12