Brainscape's Knowledge GenomeTM


Top Flashcards (Certified)
All Flashcards

FM > Unit 2 > Flashcards

Unit 2 Flashcards

1
Q

The goal of finance

A

Maximize the decider’s wealth

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

An investment is worth undertaking if it is expected that our wealth will increase as a result of the investment

A

True

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

To determine if an investment contributes to the increase of wealth, we compare which 2 figures?

A

The price of investment

The value of the investment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

The price of the investment

A

The amount of money we need to pay upfront to undertake the investment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

The value of the investment is …

A

the exact worth of the investment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Price

A

What you need to collect

What you actually paid for the investment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Value

A

What you think would be a fair price for the investment
What you think the investment is actually worth
The maximum amount of money an investor is willing to pay for an asset at a given moment in time

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

If we know the price and value of an investment, it will be easy to make the right decision

A

True

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

If price > value, the investment is:

a. good
b. bad

A

Bad because you pay more than you receive.

You lose money.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

If price = value, the investment is:

a. good
b. bad
c. the same

A

C. The same

You pay the same amount that you receive.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

If price < value, the investment is:

a. good
b. bad
c. the same

A

A. Good

You receive more than you pay so you gain money.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

We are looking for opportunities where we …

A

pay less than the value of the company.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

We find out the price by …

A

looking at the market or asking the seller of the asset.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

We find out the value by …

A

calculating the future cash flows.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

The value of money …

A

changes over time.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

15 euros now is worth __________ than 15 euros in the future.

A

more

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Why does the value of money change over time?

A
  1. Opportunity cost

2. Risk

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What is opportunity cost?

A

To receive money in the future is to lose an opportunity to buy/invest and increase your wealth now

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

If you receive 1000 euros today, you can deposit it in the bank at an interest rate of 1% and get back 1,010 euros in a year. But, if you receive that same 1000 euros in a year, you will receive ______ euros.

Therefore, you have _______ the opportunity of ______ 10 euros.

This is an example of __________.

A

If you receive 1000 euros today, you can deposit it in the bank at an interest rate of 1% and get back 1,010 euros in a year. But, if you receive that same 1000 euros in a year, you will receive 1000 euros.

Therefore, you have lost the opportunity of gaining 10 euros.

This is an example of opportunity cost .

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

In finance, people are seen as _________

A

risk averse

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Risk averse means

A

that you prefer certain outcomes to uncertain outcomes.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Since people are risk-averse, even if the opportunity cost is 0, it would be preferable to ___________ instead of ________ because ________.

A

get the money right now
in the future
if you get the money now, you have money, but if you get the money in the future, you only have the promise of money and the risk of that promise being broken.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

What risks justify the time value of money?

A
  1. Solvency
  2. Inflation
  3. Interest
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

What is solvency risk?

A

When the person who must make the payment can’t pay because they don’t have any money

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
What is inflation risk?
When you can buy less things now with the same amount of money as before because the price of goods and services went up.
26
What is interest risk?
When you have undertaken an investment and you find another investment that would have been better to undertake, but you can't undertake the second investment because you have already undertaken the first
27
Since the value of money changes overtime, any value we estimate must be associated with a specific amount
True
28
Capital
the sum of money in a given moment in time
29
Ct
the moment at which a sum is collected/paid
30
Timeline
the tool used to identify the timing of a capital
31
Future value
how much a sum of money is worth in the future
32
Ct > C0 means that the value of money ...
increases with time through accumulation
33
You can't simply add, subtract or multiply capital because ....
the time value of money is always there.
34
I(t) is
the interest in $$$$
35
I(t) =
Ct - C0 | future value - present value
36
Accumulating means
calculating the future value of a given capital | move from beginning to end
37
Value in the future > value today means that we have
inflation
38
Present value of capital
the current value of a future sum
39
Discounting
calculating the present value of a given capital | move from end to the beginning
40
i
rate of interest
41
i =
``` i = I1/C0 i = interest generated/initial capital ```
42
i =
i = (C1 - C0)/C0
43
d
rate of discount
44
d =
``` d = I1/C1 d = interest generated/final capital ```
45
d =
d = (C1 - C0)/C1
46
Simple interest
C0*i
47
``` C0 = 1000 euros i = 2% t = 3 yrs ``` The simple interest after 3 years is ______ The final value of the capital after 3 years is _________
C0 * i * t = I C3 = C0 + I
48
Compound Interest
The interests at the end of each month are added to the capital and the interest is calculated on the new capital
49
``` I = 20 euros C0 = 1000 compounded yearly t = 3 yrs ``` C1 = C3 =
``` C1 = I+C0 C3 = (C1 * i) + C1 + (C2*i) C3 = C2 + I3 ```
50
Ct (compounded) =
Ct = C0(1+i)^t
51
Ct (simple interest) =
Ct = C0(1+it)
52
Simple interest produces higher values when t < 1
True
53
Compound interest produces higher values when t > 1
True
54
Simple and compound interest produce different values if t = 1
False The produce the same values at t = 1
55
Compound interest is used for short term operations because it produces more money if t < 1
False This is simple interest
56
Compound interest is used for long-term operations because it produces more money if t > 1
True
57
i(k)
the interest rate in period k
58
i
the annual interest rate
59
i(2)
the 1/2 yearly rate
60
i(3)
the cuatrimestral rate
61
i(4)
the quarterly rate
62
i(12)
the monthly rate
63
i(360)
the daily rate
64
i(365)
the daily rate
65
i(1/2)
the two year rate
66
i(1/3)
the 3 year rate
67
i(1/4)
the 4 year rate
68
Convert the annual rate to the monthly rate (i -> i(12))
i/12 = monthly rate
69
i -> 1(360)
1/360 = daily rate
70
When estimating the value of capital ...
the time and interest must be compatible (in same units)
71
What do you do if the time and interest rates are not in the same units?
1. Convert the units of time to match the rate | 2. Convert the units for the rate to match the time
72
Two rates are equivalent if ...
for the same initial investment and period of time, the final value is the same for both interest rates C1 @ i(k) = C2 @ i(t) = Cn
73
d is the _______ discount
commercial
74
With commercial discounts, C0 =
C0 = Ct(1-dt)
75
A bill of exchange is
Like a cheque, but the bank writes it; the person with the paper collects the money from the bank, and if the bank has the paper, the bank collects from the person who wrote the cheque
76
The value on a BOE is the face value
true
77
Discount rate is the commercial discount rate
true
78
A discount at a certain interest rate is just called a discount
true
79
i = i(k)*k
true
80
non-annual rate = annual rate/period of time
true
81
discounting with a simple interest rate is the reverse of accumulating with simple interest
true
82
In many short-term financial operations, the ______ capital is not calculated using a __________ but a _________.
initial simple interest rate simple discount rate
83
Pressing F4 on the keyboard results in B5 transforming to ....
$B$5
84
The difference between an interest rate and a discount rate is ....
the interest rate is applied to the initial capital | discount rate is applied to the final capital
85
d = (C1-C0)/C1
true
86
Discounting is applied to BOEs, Treasury Bills, IOUs, loans, invoice cash, etc ...
true
87
A bill of exchange is written as an unconditional order of payment of a sum of money at a fixed or determined period of time in the future
true
88
The person who writes the BOE is called the drawer
true
89
The person is who ordered to pay is called the drawer
false the person ordered to pay is called the drawee
90
If a drawer of a BOE does not want to wait until the due date of the bill, he may ...
sell his bill to a bank at a certain rate of discount
91
If the bank buys a BOE, they are now ...
the holder AND owner of the bill
92
After getting the bill, the bank will ...
pay cash to the payee equal to the face value of the bill minus the interest or discount rate for the remaining time left on the bill
93
The cost of discounting is also known as ...
the interest paid by the drawer
94
Given that the discount rate is applied to the final capital and the interest rate is applied to the initial capital, for a same rate, the discount is more expensive than the interest.
True
95
We can calculate the rate of interest that is equivalent to a given discount rate. To so, we calculate the interests of a period.
True Interest rate: I = C0*i Discount Rate: I = C1*d In both cases I = C1 - C0
96
Interest rate: I = C0*i Discount Rate: I = C1*d In both cases I = C1 - C0
True
97
d = i/1 + i*t
True
98
i = d/1 - d*t
True
99
In the compound interest method, the non-paid interests are periodically added to the initial capital (also called the principal) to generate future interests.
True
100
In the compound interest method, the sum of the initial capital (or principal) and the interests generated to the date is called compound amount or accumulated value,
True
101
In the compound interest method, the time between two successive interest computations is the interest period, compound period or conversion period.
True
102
If we start from an initial capital of C0 and an interest rate of i per annum compounded annually, we can compute the value of that initial capital at any moment t as: Ct = C0(1+i)^t
True
103
If we know the final capital and we want to calculate the initial capital, we can isolate C0.
True C0 = Ct/(1+i)^t
104
The interests generated between the moment 0 and the moment t would be C1 - C0
True
105
I = C0[(1+i)^t -1]
True
106
If you know the initial and the final capitals, as well as the time between them, you can find the interest rate with the following formula:
Ct=C0·(1+i)^t
107
If you know the initial and the final capitals, as well as the interest rate, the time between the two capitals can be estimated with the following formula:
t=Ln(Ct/C0)/Ln(1+i)
108
Like with simple interest, we can consider that two compound interest rates referred to different periods are equivalent if, for the same initial investment and over the same time interval, the final value of the investment, calculated with the two interest rates, is equal.
True
109
We can calculate the annual rate i equivalent to a period rate ik.
True ik = (1+i)^1/k - 1
110
i = (1+ik)^k -1
True
111
“Effective rates” are called so because they are directly applied to the initial capital to calculate the generated interests.
True
112
It is common for financial contracts present a “nominal annual rate compounded on a given frequency” rather than the effective rate.
True
113
Nominal annual rates are denoted as jk, k being the number of times that rate compounds per year.
True
114
The equivalence between a nominal and an effective rate is the following: jk = ik *k
True
115
The APR is an indicator of the effective cost or output of a financial operation.
True
116
The APR includes ...
all expenses and commissions of the financial operation.
117
The APR is very useful to compare financial products
True
118
Financial institutions are obligated to report the APR in the advertising of their financial products.
True

FM (11 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2025 Bold Learning Solutions. Terms and Conditions