BUS-F 370 Module 1: Time Value of Money
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25 Terms
interest=
interest rate x initial investment
Value after 1 year=
initial investment x (1+r)
The _______________ of an investment is the amount to which an investment will grow after earning interest.
future value
Earning interest on interest is called ___________________.
compound interest.
If a bank calculated the interest only on your original investment, you would be paid ________________, which is not compounded.
simple interest
A dollar today is worth _______________ than a dollar tomorrow.
more
Present value = __________________________
(future value after t periods)/(1+r)^t
To calculate present value, we discount the future value at the interest rate r, this is known as a _______________.
discounted cash flow.
The __________________ is the interest rate used to compute the present value of future cash flows.
discount rate
t/f: present values are always calculated using compound interest.
True
T/F: You should never compare cash flows occurring at different times without first discounting them to a common date.
True
_________________ erodes the buying power of our cash.
Inflation
The rate of return that we earn ideally is ______________ than the rate of inflation
higher
_______________ will erode the buying power of the money over time, so better to have (and spend it) today.
Inflation
________________ is the concept that if I have the money now, I can take advantage of current or future opportunities to spend that money
opportunity cost
_____________ is the amount to which an investment will grow after earning interest.
future value
_____________ is interest earned on interest
compound interest
_____________ is interest earned only on the original investment.
simple interest
3 of which variables are needed to solve a lump sum problem?
PV, FV, NPER,R (interest rate)
A _____________ is the present value of a $1 future payment.
discoutn factor
A _____________ is the interest rate used to compute present values of future cash flows.
discount rate
Discount Factor=
1/(1+r)*t
Present value=
(future payment)*(1/(1+r)*t)
An __________ is a level stream of cash flows at regular intervals with a finite maturity. (Example: car loan)
annuity
A ___________ is an annuity that goes on forever, perpetually
pepertuity