Concept of TVM (time value of money) correct answers $ today not equal to $ tomorrow
Compounding (given PV, calculate FV) vs. Discounting (given FV, calculate PV) correct answers Compounding: The process of going to future value (FV) from present value (PV).
Discounting: The process of findin...
FINC 3331 Midterm || with 100% Errorless Answers.
Concept of TVM (time value of money) correct answers $ today not equal to $ tomorrow
Compounding (given PV, calculate FV) vs. Discounting (given FV, calculate PV) correct
answers Compounding: The process of going to future value (FV) from present value (PV).
Discounting: The process of finding the present value of a cash flow or a series of cash flows;
discount-ing is the reverse of compounding
Future Value (FV) correct answers The amount to which a cash flow or series of cash flows will
grow over a given period of time when compounded at a given interest rate
Present Value (PV) correct answers The value today of a future cash flow or series of cash flows
FVAn= correct answers The future value of an annuity over N periods.
PVAn= correct answers The present value of an annuity of N periods.
Annuity due... correct answers qualitatively but quantitatively only focuses on ordinary or
deferred annuity
Annuity is correct answers a financial instrument that pays a fixed amount, at a regular interval
for a finite time period; annuity due implies that payment occurs at the beginning of the period;
ordinary annuity implies that payment occurs at the end of the period
EAR (also called APY) correct answers Banks use it; avoids needs for compounding by
converting non-annual interest rates into annual rates
Amoritzed Loan correct answers a loan in which interest and principle are paid in equal
payments over the life of the loan; review textbook example including amortization schedule
(section 5-18)
Interest only (aka simple interest loan) correct answers a loan in which only interest is paid
during the life of the loan and repayment of principle is at maturity; example in the lecture notes;
you take out a 3 year loan for $10,000 at an interest rate of 4% compounded annually, your
payment stream would be as follows: $400 (.04*$10,000) at the end of each year for the next 3
years and the repayment of principle ($10,000) at the end of the 3 year period
Risk and Return is correct answers a concept of life and not exclusively a finance concept;
anything that is riskier must be accompanied by a higher return in order to compensate risk-
averse individuals to assume the added level of risk
Investor risk aversion correct answers Investors must be sufficiently compensated for taking on
risk; investors tend to be more focused on downside potential (losing money)
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