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Understanding Investment Return Components

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Understanding Investment Return Components

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Questions and Answers

What is simple interest?

Interest paid on loans calculated using the principal only (correct)

Interest charged to borrowers based on complex formulas

Interest that includes compounding

Interest paid by banks on loans

Which formula is used to calculate simple interest?

FVIF = (1+r)n

I = PRT (correct)

FV = PV / (1 + r)^n

FV = PV(1 + r)^n

What is the future value (FV) of an asset?

Value of an asset without any interest

Value of an asset at a future date based on growth rate assumptions (correct)

Value of an asset at a past date

Current value of an asset

What does the Future Value Interest Factor (FVIF) calculate?

Compound returns required for a sum to reach a specific level in the future Signup and view all the answers

In which type of annuity are payments made at the end of the year?

Ordinary annuity Signup and view all the answers

For what type of annuity are payments made at the beginning of each year?

Annuity due Signup and view all the answers

What are the components of return mentioned in the text?

Interest payments and capital gains Signup and view all the answers

In the context of investments, what does 'total return' represent?

The combination of current income and capital gain (loss) over a specified period Signup and view all the answers

Why is historical performance important in understanding investments?

To provide a meaningful basis for future expectations Signup and view all the answers

What does 'expected return' refer to in the context of investments?

The return an investor expects an investment to earn in the future Signup and view all the answers

What factors contribute to the internal level of return in an investment?

Quality of management and type of investment vehicle Signup and view all the answers

What is meant by 'external level of return' in investments?

Factors outside the direct control of the investment Signup and view all the answers