Finance

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  • Created by: sian.s
  • Created on: 25-01-20 10:46
What is a time preference for money?
An individual’s preference for possession of a given amount of money now, rather than the same amount at some future time
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If you have a time preference what must you ask for?
you must ask for something in return of you waiting to get your money in the future
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What reflects the time value of the money
The interest earned associated with the investment, which is to be materialised in the future
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What determines the trade-off between consumption today and investing and waiting for the future?
The rate of interest it is a reflection of the time value of money
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What is the time value of money (TVM)
difference between a dollar in hand today and a dollar promised in the future
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Why do cash flows need to be adjusted
• Cash flows for alternatives take place in different time periods so must be adjusted to account for the time value of money
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What does time value occur?
1. Inflation 2. Risk, further into the future in general the expected cashflow the more risk there is Re investment possibility, when cash is received it could be reinvested and therefore earn interest
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What does discount rate reflect compared to interest rate
Note a discount rate will reflect all factors affecting time value of money - inflation, risk, and re investment. Using just an interest just reflects the reinvestment reasons
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What are the basic principals of time value of money
1. The time value of the money has to be positive >= 0 It has also to compensate for the difference in the future cash flow between one choice and the next best alternative If there are several investments satisfying (1) and (2), the one having high
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What are the generalizations of the time value of money
1. value of money interest at a positive interest rate grows overtime = hello further in the future less it's worth part of rate of interest you can earn by investing equals higher interest rate more likely to forget current consumption; what Trade
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What is FV
measures the value of an investment after it earns interest for one or more periods. Future value is converting present value into what the promise will be when you demand your money back
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What is PV
measures the current value of future cash flows discounted at the appropriate interest rate
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What is compounding
the process of converting cash flows to a future value
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What is discounting
the process of converting future cash flows to a present value
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What is simple interest
the amount of interest earned on the original principle amount only
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What is CAGR
average annual growth rate over a specified period of time
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If the interest rate is higher how will the investment grow
higher the interest rate, the faster the value of an investment will grow, and the larger the amount of money that will accumulate over time. • Because of compounding, the growth over time is not linear but exponential- the dollar increase in the fu
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Card 2

Front

If you have a time preference what must you ask for?

Back

you must ask for something in return of you waiting to get your money in the future

Card 3

Front

What reflects the time value of the money

Back

Preview of the front of card 3

Card 4

Front

What determines the trade-off between consumption today and investing and waiting for the future?

Back

Preview of the front of card 4

Card 5

Front

What is the time value of money (TVM)

Back

Preview of the front of card 5
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