# Quantitative Methods - Time Value Of Money Flashcards

1
Q

What is terminal or future value?

A

The value of a deposit at the end of a period of time having received interest over that period

2
Q

What is a present value?

A

The equivalent value of the same deposit before the effects of interest

3
Q

What does calculating terminal or present values enable.

A

It provides a means of appraising investment opportunities

4
Q

What do terminal/future value calculations consider?

A

Each cash flow generated by an investment
The timing of the cash flow

They calculate how much cash could be generated to the end of the investment period if earlier returns were banked each year to generate additional compound interest.

5
Q

What determines whether we accept the investment?

A

If the returns plus the interest that they can accumulate exceeds the total that could be generated had we simply banked the cash at the outset, then we accept the investment.

6
Q

How could decision criteria be stated as?

A

An investment should be accepted if it produces a surplus in cash terms after accounting for interest.

7
Q

What does the dividend valuation model state?

A

The market value of a security is the present value of the future expected receipts, discounted at the investors required rate of return.

8
Q

What is Net Terminal Value?

A

The surplus or deficient between the investments you are investigating and the alternative

9
Q

What is the drawback of net terminal values?

A

If we are trying to evaluate investments with different end dates, we cannot compare the terminal value of one directly to the terminal value of another

10
Q

How would you go about comparing investments with different end dates?

A

Compound the interest out to a common end date

11
Q

What do present value calculation consider for an investment?

A

Each relevant cash flow
The timing of the cash flow

And calculate how much cash we would need to have invested now to generate these same amounts of cash at these same future dates

12
Q

What situations can we establish discount factor formulae to make manual calculations more straightforward?

A

Level annuities and level perpetuities

13
Q

What is an annuity?

A

It describes the situation where we have equal annual cash flows for a set period.

14
Q

How can you simplify the terminal value calculation for an annuity?

A

Multiply one years payment by the sum of the compound factors)

15
Q

When doing a terminal value calculation for an annuity what is the figure reached for sum of the compound factors called?

A

The n year annuity compound factor at whatever the rate is

16
Q

What is a perpetuity?

A

An equal annual cash flow which will continue indefinitely

17
Q

What is another way of describing the interest rate?

A

Required rate of return or cost of capital

18
Q

What are the two alternative methods for annuities and perpetuity?

A

Deducting unwanted years and discounting back

19
Q

How does the deducting unwanted years methods work for annuities and perpetuities?

A

You use the annuity or perpetuity discount factor and for the years before you are interested you simply minus then from the highest year you are interested in

20
Q

How does the discounting back method work for annuities and perpetuities?

A

You do the calculation for the number of years you are interested in multiplied by those you aren’t

21
Q

What is the relationship between present and future values?

A

If you compound the present value up for the right amount of years you will get the future value. This idea can be used to calculate the terminal value of anything for which we can calculate a present value or net present value (other than a perpetuity)

22
Q

What two factors determine the market value of a security?

A
```The returns (dividends/interest/capital growth) that the investors expect
The rate of return that the investors require```