# Time value of money Flashcards

1
Q

In order to save, you sacrifice:

A

Current consumption

2
Q

What is the risk free rate?

A

UK Government bond rate

3
Q

Why is a “dollar today worth more than a dollar in the future”?

A

Because you can invest it and earn interest

4
Q

What’s compound vs simple interest?

A

-Compounded means interest calculated using previous period, simple means interest calculated using original principle amount

5
Q

How do we get present value from future value?

A

FV / (1+r)^t

6
Q

What is future value in terms of present value, when there is more than one period per annum?

A

FV = PV(1+r/m)^txm

7
Q

In the FV multiple periods per annum formula, what is t and m?

A
t = number of years
m = number of compound periods per annum
8
Q

What is FV in terms of PV in the case of continuous compounding?

A

FV = PV e^txr

9
Q

What is PV in terms of FV in the case of continuous compounding?

A

PV = FV e^-txr

10
Q

What is present value in terms of cash flow?

A

Cash flow (C) / Discount rate (r)

11
Q

Present value of perpetuity A is given by :

A

C/r

12
Q

Present value of perpetuity B is given by:

A

C/r * 1 / (1+r) ^ t

13
Q

What is Annuity?

A

The difference between when two bond payment schedules start

14
Q

What is holding period return?

A

The rate of return that investors obtain over a specific period of time

15
Q

How do you calculate the simple value of a simple annuity?

A

C/v x ((1+r)^t - 1)