# Time value of money Flashcards

In order to save, you sacrifice:

Current consumption

What is the risk free rate?

UK Government bond rate

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

Because you can invest it and earn interest

What’s compound vs simple interest?

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

How do we get present value from future value?

FV / (1+r)^t

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

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

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

t = number of years m = number of compound periods per annum

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

FV = PV e^txr

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

PV = FV e^-txr

What is present value in terms of cash flow?

Cash flow (C) / Discount rate (r)

Present value of perpetuity A is given by :

C/r

Present value of perpetuity B is given by:

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

What is Annuity?

The difference between when two bond payment schedules start

What is holding period return?

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

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

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