Week 5

Question 1

Present value (PV)

Answer 1

Value at the start of the time period of interest

Question 2

Future value (FV)

Answer 2

Value after one or more periods of interest

Question 3

Future values vary depending on…

Answer 3

Type of interest earned on an investment or charged on a borrowing

Question 4

Simple interest

Answer 4

Interest earned only on the original principal amount invested

Question 5

Compound interest

Answer 5

Interest earned on both the initial principal and the interest reinvested from prior periods

Question 6

Interest on interest

Answer 6

Interest earned on the reinvestment of previous interest payments

Question 7

Compounding

Answer 7

Process of accumulating interest on an investment overtime to earn more interest

Question 8

Calculating future value using compound interest

Answer 8

FV = PV x (1+r)^t

Question 9

Calculating present value using compound interest

Answer 9

PV = FV / (1+r)^t

Question 10

Multiple cash flows

Answer 10

Annuities and perpetuities

Question 11

Annuity

Answer 11

Same cash flow every period for fixed number of periods

Question 12

Perpetuity

Answer 12

Same cash flow every period indefinitely (forever)