Flashcards in SU5 - Time Value of Money Deck (10):

1

## Explain Nominal interest rate

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The nominal interest rate is the rate quoted in loan and deposit agreements.

The equation that links nominal and real interest rates is: (1 + nominal rate) = (1 + real interest rate) (1 + inflation rate).

It can be approximated as nominal rate = real interest rate + inflation rate.

2

## The Formula for Future Value

### FVn = PV(1 + i)n

3

## Explain an annuity

### It is a series of equal cash flows for each of a specified number of periods.

4

## There are two types of annuities. Name and explain.

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1. an ordinary annuity - money deposited/received at the END of the period

2. an annuity due - money deposited/received at the BEGINNING of the period

5

## Formula for Present Value

### PV = FV / (1 + i)n

6

## What is the first step of a loan amortising schedule?

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Calculate PMT

PMT = PVn / PVIFAi,n

Amortising a loan actually involves creating an annuity out of a present amount.

7

## Investment decisions are made by means of capital budgeting techniques. Name them.

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1. Payback Period

2. Net Present Value

3. Profitability Index

4. Internal Rate of Return

8

## Show formula for profitability index and explain.

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1. It is calculated by dividing the present value of cash inflows by the initial investment.

2. This index measures the present value of the return per rand invested.

9

## Define internal rate of return

### It is defined as the discount rate that equates the present value of cash inflows with the initial investment associated with a project.

10