Time Value of Money Concepts
16 Questions
2 Views

Choose a study mode

Play Quiz
Study Flashcards
Spaced Repetition
Chat to Lesson

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

What is the term for the desire to obtain money today as opposed to waiting to receive the same amount in the future?

Time preference for money

What are the reasons for time preference for money? (Select all that apply)

  • Availability of investment opportunities which may not be available in the future (correct)
  • Urgency of current needs requiring financial support (correct)
  • Availability of discounts in the market (correct)
  • Uncertain future cash flows, which may never be realized (correct)
  • Reduction in the value of money due to inflation (correct)

    • Which of the following areas can benefit from the application of the Time Value of Money concept?

  • Preparation of loan amortization schedules (correct)
  • Capital Budgeting (correct)
  • Valuation of assets (correct)

    • What is the process of determining the future value of an investment called?

    <p>Compounding</p> Signup and view all the answers

    What is the term for the methods used to determine the present value of future cash flows?

    <p>Discounting</p> Signup and view all the answers

    What are the two types of annuities?

    <p>Ordinary annuity (A), Annuity due (B)</p> Signup and view all the answers

    What is the term for a series of cash flows of equal amounts, receivable or payable, each year?

    <p>Annuity</p> Signup and view all the answers

    What is the formula to calculate the future value of an ordinary annuity?

    <p>FV = A * (((1+r)^n - 1) / r)</p> Signup and view all the answers

    What is the formula to calculate the future value of an annuity due?

    <p>FV = A * (((1+r)^n - 1) / r) * (1+r)</p> Signup and view all the answers

    What is the term for a series of cash flows of equal amounts, receivable or payable, at the beginning of each year?

    <p>Annuity due</p> Signup and view all the answers

    What is the term for a series of cash flows of equal amounts, receivable or payable, at the end of each year?

    <p>Ordinary annuity</p> Signup and view all the answers

    What is the term used to describe a financial plan that shows how a loan is repaid?

    <p>Loan amortization schedule</p> Signup and view all the answers

    What is the formula to calculate the annual installment for a loan?

    <p>Annual Installment = Amount Borrowed / PVIFA(r,n)</p> Signup and view all the answers

    What is the term for a financial instrument that provides a series of equal payments over an indefinite period?

    <p>Perpetual annuity</p> Signup and view all the answers

    What is the formula for calculating the present value of a perpetual annuity?

    <p>Total PV = A / r</p> Signup and view all the answers

    What is the formula for calculating the present value of a growing perpetual annuity?

    <p>Total PV = A / (r - g)</p> Signup and view all the answers

    Flashcards

    Time Value of Money (TVM)

    The principle that the value of money changes over time, affecting investment decisions.

    Time Preference for Money

    The desire to receive money now instead of later due to inflation, urgency, or opportunities.

    Capital Budgeting

    Analyzing potential investments and projects to allocate capital effectively.

    Compounding

    The process of calculating future value based on present value, interest rate, and time.

    Signup and view all the flashcards

    Present Value (PV)

    The current worth of a future sum of money or cash flow given a specified rate of return.

    Signup and view all the flashcards

    Future Value (FV)

    The value of an investment after earning interest over a period of time.

    Signup and view all the flashcards

    Annuitization

    Conversion of a lump sum into a series of periodic payments.

    Signup and view all the flashcards

    Ordinary Annuity

    An annuity with payments made at the end of each period.

    Signup and view all the flashcards

    Annuity Due

    An annuity with payments made at the beginning of each period.

    Signup and view all the flashcards

    Discounting

    The process of determining the present value of a future amount.

    Signup and view all the flashcards

    Loan Amortization

    The process of paying off a loan through fixed payments over time.

    Signup and view all the flashcards

    Effective Interest Rate

    The actual interest rate an investor earns after accounting for compounding.

    Signup and view all the flashcards

    Growing Annuity

    An annuity that grows at a constant rate over time.

    Signup and view all the flashcards

    Perpetual Annuity

    An annuity that pays indefinitely without an end date.

    Signup and view all the flashcards

    Discount Factor

    A multiplier used to convert future cash flows into present value.

    Signup and view all the flashcards

    Capital Investment

    Funds used by a company to acquire or upgrade physical assets.

    Signup and view all the flashcards

    Future Value Interest Factor (FVIF)

    A factor used to calculate future value based on a specific interest rate.

    Signup and view all the flashcards

    Present Value Interest Factor (PVIF)

    A factor used to calculate present value from a future cash flow.

    Signup and view all the flashcards

    Compounding Frequency

    The number of times interest is applied to the principal per year.

    Signup and view all the flashcards

    Total Investment Return

    The total gains or losses generated from an investment over its lifetime.

    Signup and view all the flashcards

    Loan Repayment Schedule

    A detailed table outlining how a loan will be repaid over time.

    Signup and view all the flashcards

    Annuity Payment Calculation

    Formula to determine fixed payments to be received or paid on an annuity.

    Signup and view all the flashcards

    Principal vs. Interest

    Principal is the original loan amount, while interest is the cost of borrowing.

    Signup and view all the flashcards

    Investment Opportunity Cost

    The potential benefit lost when choosing one investment over another.

    Signup and view all the flashcards

    Future Cash Flow

    Projected amounts of money expected to be received in the future.

    Signup and view all the flashcards

    Real Rate of Return

    The return on investment adjusted for inflation.

    Signup and view all the flashcards

    Investment Return Rate

    The percentage gain or loss relative to original investment costs.

    Signup and view all the flashcards

    Market Discount Rate

    The rate used to determine the present value of future cash flows.

    Signup and view all the flashcards

    Loan Financing Cost

    The total cost of borrowing funds, including interest and fees.

    Signup and view all the flashcards

    Study Notes

    Time Value of Money

    • Money's value changes over time. Financial managers should consider time value of money when making investment decisions.

    Time Preference for Money

    • People prefer receiving money today over receiving the same amount in the future. Reasons include:
      • Inflation reduces the value of money over time.
      • Investment opportunities might not be available in the future.
      • Market discounts are available.
      • Urgent financial needs may arise.
      • Future cash flows may not be realized.

    Importance of Time Value of Money

    • Time Value of Money (TVM) is crucial for:
      • Capital budgeting.
      • Asset valuation.
      • Loan amortization scheduling.

    Techniques in TVM

    • Techniques used in TVM include:
      • Compounding.
      • Discounting.
      • Loan amortization schedules.

    Compounding Techniques

    • Compounding determines future value.
    • Common compounding periods are annual, semi-annual, quarterly, monthly, weekly, and daily.
    • Continuous compounding is also possible.
    • Future value (FV) is calculated using the formula FV = PV(1 + r)n, where PV is present value, r is interest rate, and n is the number of periods.

    Discounting Techniques

    • Discounting determines present value (PV) from future value (FV). It is the reverse of compounding, using the formula PV = FV/(1 + r)n.
    • It's used for evaluating present value of future cash flows at a specific discount rate.

    Loan Amortization Schedules

    • Loan amortization schedules detail the breakdown of loan payments showcasing how principal and interest payments change over time.
    • Schedules show periodic installments, interest, principal repayments, and outstanding balances.

    Studying That Suits You

    Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

    Quiz Team

    Related Documents

    Time Value of Money PDF

    Description

    Explore the essential principles of the Time Value of Money (TVM) and understand how money's value fluctuates over time. This quiz covers key topics such as time preference for money, importance in financial decision-making, and compounding techniques. Test your knowledge on how financial managers utilize TVM for investment and budgeting.

    More Like This

    Use Quizgecko on...
    Browser
    Open
    Browser
    Browser