1. In a few words, what is the definition of the time value of money?
2. In a few words, why are dollar amounts to be received in the future not comparable at their future values?
3. In a few words, what is the definition of "compound interest?"
4. When calculating the present value of money to be paid or received in the future, what are the 2 considerations in determining r?
5. The FV formula assumes interest is compounded at the rate of r, and the PV formula reverses compounding at the rate of r. Give an example where this assumption must be true and one where it may not be true.
6. Ten years after graduating from Pace, you decide to save $5,000 a year. If you do this for 35 years and reinvest all the earnings, how much will you save:
a. If you earn 4%/year, or
b. If you earn 8%/year?
7. In 2 or 3 words, why is the FV at 8% not 2x the FV at 4% for question #6?
8. If you can reliably earn 7%/year, which of the following 2 investment opportunities with similar risk should you do?
a. Invest $100 today which is expected to pay $40 at the end of Years 1, 2 and 3, or
b. Invest $100 today which is expected to pay $80 in 5 years and $90 in 10 years.
9. You have graduated from Pace, and after having worked full time for 3 years, you are considering quitting your current job and taking 2 years to get an MBA degree.
a. Identify the most significant costs of this investment, and
b. Briefly explain how you could quantify whether it is a good idea.