Did you know that Amazon is offering 6 months of Amazon Prime - free two-day shipping, free movies, and other benefits - to students? One of the biggest obstacles to correctly solving time value of money problems is identifying the cash flows and their timing.
The Time Value of Money If you invest money at a given interest rate, what will be the future value of your investment? What is the present value of a cash flow to be received in the future?
The present value of a future cash payment is the amount that you would need to invest today to match that future payment. How can we calculate present and future values of streams of cash payments?
A level stream of cash payments that continues indefinitely is known as a perpetuity; one that continues for a limited number of years is called an annuity. The present value of a stream of cash flows is simply the sum of the present value of each individual cash flow.
Similarly, the future value of an annuity is the sum of the future value of each individual cash flow.
Shortcut formulas make the calculations for perpetuities and annuities easy. What is the difference between real and nominal cash flows and between real and nominal interest rates? A dollar is a dollar, but the amount of goods that a dollar can buy is eroded by inflation.
If prices double, the real value of a dollar halves. Financial managers and economists often find it helpful to reexpress future cash flows in terms of real dollars—that is, dollars of constant purchasing power. Be careful to distinguish the nominal interest rate and the real interest rate—that is, the rate at which the real value of the investment grows.
Discount nominal cash flows that is, cash flows measured in current dollars at nominal interest rates. Discount real cash flows cash flows measured in constant dollars at real interest rates.
Never mix and match nominal and real. How should we compare interest rates quoted over different time intervals—for example, monthly versus annual rates?
Interest rates for short time periods are often quoted as annual rates by multiplying the perperiod rate by the number of periods in a year.
These annual percentage rates APRs do not recognize the effect of compound interest, that is, they annualize assuming simple interest.
The effective annual rate annualizes using compound interest. It equals the rate of interest per period compounded for the number of periods in a year.• Principle 1: Money Has a Time Value. – This chapter applies the time value of money concepts to annuities, perpetuities and complex cash flows.
• Principle 3: Cash Flows Are the Source of Value. – This chapter introduces the idea that principle 1 and. d. These numbers refer to time of day that the change took place.
e. The yen is a reserve currency. Ans: b 2. The price at which one can enter into a contract today to buy or sell a currency 30 days from now is called a a.
Reciprocal exchange rate. b. Effective exchange rate. c. Exchange rate option. d. Forward exchange rate. e. Multilateral exchange rate. Business Studies Care(BSC) Friday, June 13, Time Value of Money-Multiple Choice Questions(MCQ): Chapter Three: Time Value of Money.
Which factor of the following has vast importance in Time Value of Money? a. Identify the interest rate. b. Investment decision taken. Multiple choice questions: Parts A and B (to complement Test Bank 1) Parts A and B (to complement Test Bank 1) Based on purchasing power parity, the expected spot value for the Swedish krona in two years would be: For the Fisher Effect to hold, what must happen if the real rate of interest is 2%, the rate of inflation is % and the.
Self-Test Quiz. Welcome to the Self-Test Questions for Chapter 6. When you attempt and submit the set of Multiple-Choice Questions, your work will automatically be .
What could a guaranteed promise of £ payable in ten years time be sold for, assuming the rate of interest was %? 5. We multiple a given future value by this in order to get its present value equivalent.