week 2

Question 1

What is the time value of money?

Answer 1

The idea that a pound today is worth more than a pound tomorrow due to interest and earning potential.

Question 2

Why is money worth more today than in the future?

Answer 2

Because of interest rates and the money’s earning power.

Question 3

What three factors are considered in time value of money decisions?

Answer 3

Size of cash flows, timing between cash flows, and rate of return.

Question 4

What is a timeline in finance used for?

Answer 4

To visualize the size and timing of cash flows over time.

Question 5

What is an inflow?

Answer 5

Cash received; represented as a positive number.

Question 6

What is an outflow?

Answer 6

Cash paid or invested; represented as a negative number.

Question 7

What is present value (PV)?

Answer 7

The value today of a future cash flow.

Question 8

What is future value (FV)?

Answer 8

The value of a cash flow at a future point in time.

Question 9

What is the formula for FV in 1 year?

Answer 9

FV = PV × (1 + i)

Question 10

What is compounding?

Answer 10

Earning interest on both principal and previous interest.

Question 11

What is the formula for FV in N years?

Answer 11

FVn = PV × (1 + i)^N

Question 12

How does compounding work over time?

Answer 12

Interest earns more interest, especially after long periods (e.g., 30 years).

Question 13

What does converting PV to FV involve?

Answer 13

Compounding.

Question 14

What does converting FV to PV involve?

Answer 14

Discounting.

Question 15

What is the formula for PV from FV over N years?

Answer 15

PV = FV / (1 + i)^N

Question 16

What is the formula for PV with multiple rates?

Answer 16

PV = FV / (1+i1)(1+i2)…(1+in)

Question 17

Why do we use PV and FV calculations?

Answer 17

To compare cash flows at different times and make better financial decisions.

Question 18

What is the power of compounding?

Answer 18

Long-term growth through interest on interest.

Question 19

How does discounting help decision-making?

Answer 19

Helps compare future cash flows to present value offers.

Question 20

What is the purpose of FV with multiple cash flows?

Answer 20

To understand wealth accumulation over time (e.g., retirement).

Question 21

How do you handle multiple annuities in FV calculations?

Answer 21

Calculate each FV separately, then add them.

Question 22

What is an annuity?

Answer 22

A series of equal payments at regular intervals.

Question 23

What is a simple annuity?

Answer 23

An annuity with only one set of equal payments.

Question 24

How do you calculate present value of multiple cash flows?

Answer 24

Discount each cash flow to present and add them.

Question 25

What is the purpose of PV in business?

Answer 25

Used in car loans, mortgages, and evaluating business opportunities.

Question 26

What is the present value of level cash flows?

Answer 26

PV of equal payments received over time.

Question 27

How do you manage multiple annuities in PV?

Answer 27

Separate and adjust each annuity stream to match the required values over time.

Question 28

What is the difference between ordinary annuity and annuity due?

Answer 28

Ordinary annuity pays at the end; annuity due pays at the beginning of each period.

Question 29

Give an example of annuity due.

Answer 29

Rent or subscriptions paid at the beginning of the period.

Question 30

What is APR (Annual Percentage Rate)?

Answer 30

Yearly cost of a loan including fees, but not compounding.

Question 31

What is EAR (Effective Annual Rate)?

Answer 31

True cost of borrowing that includes compounding effects.

Question 32

Why is APR useful?

Answer 32

Useful for comparing loans with different interest rates and fees.

Question 33

Why is EAR useful?

Answer 33

Shows actual interest paid/earned and allows better comparison between products with different compounding intervals.

Question 34

What is the difference between APR and EAR?

Answer 34

APR doesn’t account for compounding; EAR does.