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Questions and Answers
How does increasing the delay in receiving a future cash payment affect its present value, assuming other factors remain constant?
How does increasing the delay in receiving a future cash payment affect its present value, assuming other factors remain constant?
- The present value remains unchanged.
- The present value increases linearly with the delay.
- The present value decreases. (correct)
- The present value increases exponentially with the delay.
What is the primary purpose of discounting in financial analysis?
What is the primary purpose of discounting in financial analysis?
- To inflate future cash flows to account for inflation.
- To calculate the simple interest earned on an investment.
- To determine the present value of a future sum of money. (correct)
- To determine the future value of a present investment.
Which type of interest is used when calculating present values?
Which type of interest is used when calculating present values?
- Compound interest (correct)
- Simple interest
- Nominal interest
- Prime interest
Assuming a constant interest rate, how does the present value of a future payment change if the interest rate increases?
Assuming a constant interest rate, how does the present value of a future payment change if the interest rate increases?
What happens to the future value of $1 invested with compound interest as time passes?
What happens to the future value of $1 invested with compound interest as time passes?
You have the option to receive $1,000 either one year from now or two years from now. Assuming a positive discount rate, which option has a higher present value?
You have the option to receive $1,000 either one year from now or two years from now. Assuming a positive discount rate, which option has a higher present value?
If two investments have the same future value, but one requires waiting twice as long to receive the payment, how do their present values compare?
If two investments have the same future value, but one requires waiting twice as long to receive the payment, how do their present values compare?
Which scenario would result in the lowest present value, assuming all other factors are equal?
Which scenario would result in the lowest present value, assuming all other factors are equal?
What is the relationship between the time you must wait for money and its present value?
What is the relationship between the time you must wait for money and its present value?
What is the effect of an increase in time on the future value of $1 invested with compound interest, all other factors being equal?
What is the effect of an increase in time on the future value of $1 invested with compound interest, all other factors being equal?
Flashcards
Discounting
Discounting
Finding the present value of a future sum by accounting for the time value of money.
Present Value (PV)
Present Value (PV)
The current worth of a future sum of money, given a specified rate of return.
Present Value vs. Time
Present Value vs. Time
Present values decrease as the time until the payment increases.
PV and Compound Interest
PV and Compound Interest
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Study Notes
- Present value is calculated by discounting future value at the interest rate i for the number of periods until payment.
- Discounting determines the present value (PV) of a future sum.
- Present values are always calculated using compound interest.
- The future value of $1 invested with compound interest increases over time.
- Present values decline when future cash payments are delayed.
- The longer the wait for money, the less it is worth today.
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