Finance Exam 2: Time Value, Annuities, Bonds, and Stock Market Concepts

What is Time Value of Money (TVM)?

The concept that money available today is worth more than the same amount in the future due to its potential earning capacity.

What is a lump sum?

A single payment made at a particular time, as opposed to a series of payments made over time.

What is the Rule of 72?

A formula used to estimate the number of years required to double the invested money at a fixed annual rate of return by dividing 72 by the annual interest rate.

What is an annuity?

A series of equal payments made at regular intervals, typically used in finance for retirement income.

What is the difference between an ordinary annuity and an annuity due?

An ordinary annuity pays at the end of each period, while an annuity due pays at the beginning of each period.

What is cash flow?

The total amount of money being transferred into and out of a business, especially as affecting liquidity.

What is a perpetuity?

A financial instrument that provides a never-ending stream of cash flows, typically used in valuation models.

What are bond characteristics?

Features of bonds including maturity date, interest rate, credit quality, and whether they are callable or convertible.

What is a callable bond?

A bond that can be redeemed by the issuer prior to its maturity date at a specified call price.

What is an Initial Public Offering (IPO)?

The process through which a private company offers shares to the public for the first time to raise capital.

What is the difference between a bull market and a bear market?

A bull market is characterized by rising prices and investor confidence, while a bear market is marked by falling prices and pessimism.

What are growth stocks?

Stocks of companies that are expected to grow at an above-average rate compared to their industry or the overall market.

What are income stocks?

Stocks that pay regular dividends and are typically less volatile than growth stocks.

What is the Efficient Market Hypothesis?

A theory that states that asset prices reflect all available information, making it impossible to consistently achieve higher returns than the overall market.

What are the forms of market efficiency?

Weak form, semi-strong form, and strong form, which describe the degree to which information is reflected in stock prices.