Time Value of Money #1
Future Value = Present Value + (1 + r) n
What is the expression for calculating the future value of an investment?
The tendency of prices to increase over time, and the period when there are higher interest rates.
What is inflation?
The effective annual rate of an investment is equal to its quoted interest rate when the investment is compounded.
What is annually?
A graph showing the relationship between yields and maturities of securities on a particular date.
What is a yield curve?
Multiple payments of different amounts over a period of time.
What are uneven cash flows?
The process of determining the present value of a cash flow or a series of cash flows to be received or paid in the future.
What is discounting?
A CCC corporate bond with a 10-year maturity.
What is the bond that has the greatest default risk?
When the payment for an annuity is made at the end of each period.
What is an ordinary annuity?
The return generated by an investment is expressed as a percentage and calculated by dividing the investment's cash flows by its purchase price.
What is a yield?
Other things held constant, long-term interest rates are greater than short-term interest rates; that is, the yield curve is upward sloping.
What is the liquidity preference theory?
The process of determining the value of an amount or a series of cash flows that will grow in the future when interest is applied.
What is compounding?
The chance that a financial asset will not earn the return promised.
What is risk?
An annuity with payments that occur at the beginning of each period.
What is an annuity due?
These rates tend to be smoother and less volatile because they have more time to respond to the shocks of the economy.
What are long-term interest rates?
They have no default risk because everyone believes the U.S. government will pay its debt on time.
What are treasury securities?
The tendency of prices to increase over time.
What is risk?
The return generated by an investment is expressed as a percentage and calculated by dividing the investment's cash flows by its purchase price.
What is a yield?
The rate of return on the best available alternative investment of equal risk.
What is the opportunity cost rate?
A premium that investors add to the real risk-free rate of return to account for inflation that is expected to exist during the life of an investment.
What is the inflation premium?
A premium that is added to the rate on a security if the security cannot be converted to cash on short notice at a price that is close to the original cost.
What is liquidity premium?
The payment of utility bills is an example of a cash flow pattern (stream) seen in business.
What is uneven cash flows?
The return that borrowers expect to earn on their investments, the preference of savers to spend their income in the current period rather than delay their consumption until some future period, the risks associated with an investment, and the expected inflation.
What are the four fundamental factors that affect the cost of money?
The effective annual rate of an investment equals its quoted interest rate.
What is when an investment is compounded annually?
Both the demand for money and the rate of inflation tend to fall, which prompts the Federal government to take actions to decrease interest rates.
What are recessions?
The production opportunities that exist in the economy represent one of the four fundamental factors that affect this.
What is the cost of money?