LO 0-5 Time Value of Money Part 1

Question 1

What is the future value of $500 today in 1 year from now? Assume a risk free rate of 6%

Answer 1

FV = PV(1+i)
FV = 500* (1.06)
FV = 530

Question 2

The present value of $2,220 discounted 1 year at 5%. Round to the nearest dollar.

Answer 2

PV = FV / (1+i)
PV = 2220/1.05
PV = 2114

Question 3

Which of the following will give you the present value of a future amount discounted 1 year?

PV * (1+i)
FV / (1+i)
PV / (1/i)
FV * (1+ i)

Answer 3

FV / (1+i)

Question 4

Assuming a discount rate of 9% choice is better:
Choice A: $500 today
Choice B: $540 1 year from now.

Answer 4

500
vs
540 / 1.09 = 495

Choice A

Question 5

Assuming a discount rate of 4% choice is better:
Choice A: $500 today
Choice B: $540 1 year from now.

Answer 5

500
vs
540 / 1.04 = 519

Choice B

Question 6

Time Value of Money (TVM)

Answer 6

not just the amount of $$ that matters but the timing when you will receive the money

for ex: stocks - right to future payments

bonds - future interest payments

“how long until you get paid?”

Question 7

Present Value Formula

Answer 7

PV = FV / (1 + i)

Question 8

Future Value Investment

Answer 8

FV = PV (1 + i)

Question 9

future interest rate is the

Answer 9

rate of return

Question 10

You can get $200 today or $218 in 1 year with 10% interest rate

Answer 10

FV of $200
=200 ( 1 + 10%) = $220

PV of $218
= 218 / (1 + 10%) = $198.91

Choice A is better.

Question 11

risk free investment only if you invest in

Answer 11

treasury

Question 12

Present value

Answer 12

allows us to value stocks and bonds if we can estimate the future payments and discount rate we can figure out their value

assume future payouts - earnings and dividends
interest payments with appropriate discount rate

value securities