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7 Cards in this Set
- Front
- Back
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In order to determine the future value of some lump sum, we must use the process of
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CompoundingCompounding means moving a sum of money further into the future.
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Discount means moving a sum from the future backwards.
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Discount means moving a sum from the future backwards.
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The discount rate consists of the risk free rate plus the risk premium.TrueFalse
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This is true. From the text, the equation is: Rate = risk free rate + risk premium = Rf + risk premium. There is also a call-out box with the same equation.
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A dollar today is worth more than a dollar tomorrow.
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Answer:TrueThe answer is true. According to the idea of time value of money, we could take the dollar today andinvest it in hopes of having more than one dollar tomorrow.
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Would you rather have $100,000 today or $100,000 one year from today?
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Answer: I'd rather have $100,000 today.You should prefer to have $100,000 today. At a minimum, you could place the $100,000 in asavings account at a bank and have slightly more than $100,000 one year from today due to the interest that you would receive. Or you can think of it another way. If you receive the money a year in the future, it will be discounted by some positive discount rate and you will have less than $100,000 in today’s dollars. So the question becomes whether you want $100,000 today or less than $100,000 today. Assuming you’re like us, you want the greater amount!
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Future value = present value × (1 + i)nwhere: n = number of compounding periods
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Future value = present value × (1 + i)nwhere: n = number of compounding periods
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Compounding involves finding the future value of a cash flow (or set of cash flows) using a given discount or interest rate. Whether we are moving that cash flow forward in time 1 year or 100 years, the process is the same. We will start our discussion of compounding, and of time value of money calculations in general, by calculating the future value of a single sum.
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Compounding involves finding the future value of a cash flow (or set of cash flows) using a given discount or interest rate. Whether we are moving that cash flow forward in time 1 year or 100 years, the process is the same. We will start our discussion of compounding, and of time value of money calculations in general, by calculating the future value of a single sum.
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