Lecture 1 TVM

Question 1

What is the Key Idea of the TVM concept?

Answer 1

£1 today is worth more than £1 tomorrow due to earning potential.

Question 2

What is the Rule of 72 and its formula?

Answer 2

Rule of 72 = time to double an investment
Time to double = 72 / interest rate

Question 3

Describe the following Cash Flow Types:
- Perpetuity
- Growing Perpetuity
- Annuity
- Growing Annuity

Answer 3

Perpetuity = Constant, infinite cash flows
Growing Perpetuity = Infinite cash flows, growing at a constant rate
Annuity = Constant for a fixed period
Growing annuity = Grows at rate g, fixed period

Question 4

What are the loan types?

Answer 4

• Pure discount loan
• Interest-only loan
• Amortized loan

Question 5

Pure discount loan?

Answer 5

Lump sum repaid at end e.g. T Bills

Question 6

Interest-Only loan?

Answer 6

Periodic interest, lump-sum principal at maturity

Question 7

Amortized loan?

Answer 7

Regular payments include principal and interest

Question 8

What is the Firm Valuation Concept?

Answer 8

Value = PV of expected future free cash flows

Question 9

Difference between Ordinary Annuity and Annuity Due?

Answer 9

Ordinary Annuity: Payments made at end of each period.
Annuity Due: Payments made at the beginning of each period.