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28 Cards in this Set
- Front
- Back
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Later money on a time line:
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Future value
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The rate used to calculate the present value of future cash flows:
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Discount rate
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What happens in a cash inflow?
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You receive money (+)
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Answers the question, "How much do I have to invest today to have some amount in the future?"
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Present value
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The "exchange rate" between earlier money and later money:
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Interest rate
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When a deposit or investment earns interest on interest previously received, it is said to be earning _____.
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Compound interest
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For a given time period, the higher the interest rate, the higher the _____.
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Future value
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What is the effect of compounding simple interest?
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Interest is NOT reinvested
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What are the 5 different names for the interest rate?
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1) discount rate
2) exchange rate 3) cost of capital 4) opportunity cost of capital 5) required return |
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For a given interest rate the longer the time period, the _____ the present value.
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Lower
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What is the effect of compounding compound interest?
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Interest IS reinvested
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Finding the present value of some future amount:
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Discounting
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Earlier money on a time line:
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Present value
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What happens in a cash outflow?
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You pay money (-)
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For a given time period, the _____ the interest rate, the _____ the future value.
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Higher, higher
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The effects of _____ is small for a small number of periods, but increases as the number of periods increase.
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Compounding
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Period interest rate:
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r
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The period interest rate times the number of periods in the year:
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Simple rate (I/YR)
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For a given interest rate the longer the time period, the lower the _____.
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Present value
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Used to solve the implied interest rate for an investment:
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Discount rate
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Number of payment periods:
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N
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The simple rate of interest divided by the number of periods in a year:
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Period rate (r)
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For a given interest rate the longer the time period, the _____ the future value.
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Higher
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The effects of compounding get larger as:
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The number of periods increase
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For a given time period, the higher the interest rate, the _____ the present value.
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Smaller
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Interest rate per payment period:
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r
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For a given interest rate the longer the time period, the higher the _____.
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Future value
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What must P/YR equal for I/YR to be the period rate?
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P/YR must equal 1
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