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35 Cards in this Set
- Front
- Back
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What is the single most important skill for a student to learn? |
the manipulation of money through time |
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Why does money that you receive have different values at different points in time? |
because of interest rates |
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When you get money now... |
you can do much more with it. |
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Receiving Money one year from now or two years from now is... |
different than getting all the money today. |
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Why is getting money now different? |
because it is compounded. |
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earlier money on a time line |
present value |
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later money on a time line |
future value |
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exchange rate between earlier money and later money |
interest rate |
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Move to left |
present value |
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move to right |
future value |
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Four synonyms for interest rate |
discount rate cost of capital opportunity cost of capital required return or required rate of return |
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Where's the formula for future value? |
Last one in column two |
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FV |
future value |
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PV |
present value |
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r |
period interest rate |
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t |
number of periods |
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What is (1+r)^t? |
the future value interest factor |
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What are the two different types of interest? |
simple and compound |
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What is the difference between simple in compound interest? |
simple: interest only on the principal compound: interest on interest |
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I |
period interest rate (entered as a percent, not decimal) |
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N |
number of periods |
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The effect of compounding is small for a small number of periods, but... |
increases as the number of periods increases |
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If we can go forward in time to the future (FV), then... |
we can go back in time to the present. |
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Finance uses the process of moving future funds back into the present when we value financial instruments like... |
bonds, preferred stock, common stock, and projects. |
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To go backward in time to the present, all we need to do is... |
refocus our concept of moving money through time. |
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present value = |
FV/(1+r)^t |
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When we talk about discounting, we mean... |
finding the present value of some future amount |
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When we talk about the value of something, we are... |
talking about the present value. |
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Finance uses ___________ as the verb for going into the future and ________ as the verb for bringing funds into the present. |
compounding discounting |
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For a given interest rate... |
the longer the time period, the lower the present value |
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The present value doesn't have to be that high because... |
you are compounding it over a long period of time. |
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For a given time period... |
the higher the interest rate, the smaller the present value. |
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r = |
(FV/PV)^1/t - 1 |
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What is the important property of logs to remember? |
you can bring the power out front by taking the natural log of both sides |
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t = |
ln (FV/PV)/ln (1+r) |
