Week10

Question 1

how to calculate future value

Answer 1

present value * (interest + 1)^T

Question 2

why is money today more valuable than money in future

Answer 2

cos of inflation, and of the effect of compoundning. this helps to explain why future value interest factor and present value interest factor is more than 1 and less than one respectively

Question 3

what is the present value of a lump sum

Answer 3

lump sum / (1+interest)time

Question 4

how to get from nominal rate to effective rate

Answer 4

take the investment, compound it with the nominal rate, to get the equivalent effective rate, to the time periods that you divide by

Question 5

for a given nominal rate, the higher the compounding, will the effective rate be higher or lower

Answer 5

higher

Question 6

what is the difference between an ordinary annuity and an annuity due

Answer 6

the first you pay out in one year , the second you pay out immediately

Question 7

for an annuity that pays out 100 for 10 years, is the PV of the annuity more than or less than 1000

Answer 7

less

Question 8

for the same annuity, is the FV more than or less than 1000

Answer 8

more

Question 9

what assumptions are there for annuities

Answer 9

CF same, interest rate same, CF separated by same time period (exactly 1 time period)

Question 10

is the present value of a perpetual annuity 0

Answer 10

NO. use present value formula to calculate, with t going to infinity. cos you compound every s

Question 11

what is the present value of an annuity defined in the frame of time period

Answer 11

one time period before the first cash flow starts

u start your summation always at t = 1

Question 12

revise question from week 10 lecture

Answer 12

be able to recite the two ways of doing it