CFA Level 1 Time Value of Money Quiz: Practice Questions

12 Questions

What does the time value of money concept explain?

Preference for receiving money today over the same amount in the future

What does opportunity cost refer to in the context of time value of money?

Return of the alternative investment foregone by choosing a particular option

How does inflation impact investment decisions according to the text?

Erodes the purchasing power of money over time

What does continuous compounding involve?

Maximizing the number of compounding periods to achieve the highest future value

How do different compounding periods impact future value calculations?

Varying compounding periods affect future value calculations differently

What is the purpose of the time value of money equation mentioned in the text?

Link present value, future value, interest rate, and number of time periods

What does the future value equation involve dividing by?

(1 + r)

Why are present value calculations crucial?

To determine the amount needed today for future financial obligations

What are bonds typically issued in increments of?

$1,000

How are zero coupon bonds described?

Discount securities that don't pay interest but redeemed at face value at maturity

What is used to discount future cash flows when determining the price of a bond?

Market discount rate

How are equity instruments priced based on expected future cash flows?

Based on present value of expected future cash flows

Study Notes

The topic discussed is the time value of money within the context of the CFA program Level 1.
The learning module on time value of money is divided into two parts, each with about 70-75 slides.
The first part focuses on calculating and interpreting present value, while the second part extends to fixed income securities, equity securities, forward rates, and option values.
Time value of money concept explains the preference for receiving money today over the same amount in the future, considering factors like opportunity cost and inflation.
Opportunity cost refers to the return of the alternative investment foregone by choosing one option over another.
Inflation can erode the purchasing power of money over time, affecting investment decisions and consumption choices.
Investing money today involves weighing the benefits between current consumption and potential future returns.
The concept of uncertainty applies to future cash flows from investments, considering factors like bank failures or government interventions.
The time value of money equation links present value, future value, interest rate, and number of time periods.
Compounding periods can vary from annually to semiannually, quarterly, monthly, weekly, or even daily, impacting future value calculations.
Continuous compounding involves maximizing the number of compounding periods to achieve the highest future value.
The future value equation involves dividing future value by (1 + r) to account for interest rates.
Present value calculations are crucial in determining the amount needed today to meet future financial obligations.
Financial calculators are used to compute present value based on future value, interest rate, and number of periods.
Adjustments in compounding periods can be made directly on financial calculators instead of using complex formulas.
Bonds are fixed income securities issued by corporations and governments to raise capital for various purposes.
The market discount rate or yield to maturity is used to discount future cash flows when determining the price of a bond.
Bonds can have different structures such as level payments, periodic interest, or zero coupon bonds that don't pay interest.
Zero coupon bonds are discount securities that do not pay interest but are redeemed at face value at maturity.
Bonds are typically issued in increments of $1,000, but conventionally reported based on a $100 par value.
Future value calculations for securities involve applying compound interest formulas based on the given interest rate and time period.- Individual goes through calculations using a financial calculator for various financial scenarios.
Examples include calculating future values, present values, and pricing zero coupon bonds.
Mention of a scenario where interest rates are negative, impacting bond prices.
Explanation of coupon payments and their significance in bond valuation.
Introduction to ordinary annuities and annuities due in the context of bonds and mortgage payments.
Discussion on perpetuity bonds where payments continue indefinitely.
Presentation of calculations for pricing bonds with different coupon rates and yields to maturity.
Introduction to pricing equity instruments based on expected future cash flows.
Explanation of constant dividend models and how to calculate the present value of shares.
Description of the constant dividend growth model for stocks with growing dividends.
Introduction to multistage dividend discount models for varying growth rates.
Instructions for calculating the present value of shares using different growth rates.
Reference to using a financial calculator's cash flow button for calculations.
Encouragement for candidates to practice problems at the end of the learning module for better understanding.