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Chapter 4 Concept Questions Future value (definition) Present value (definition)

Question Types : Multiple choice, True/false w/ explanation, Short answer, Short essay, Fill-in-the-blank Problems : Multiple choice answer; must show all work / calculator inputs & cash flow diagrams Overview of Finance The difference between Value and Price

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Chapter 4 Concept Questions Future value (definition) Present value (definition)

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  1. Test 1 Review • Question Types: Multiple choice, True/false w/ explanation, Short answer, Short essay, Fill-in-the-blank • Problems: Multiple choice answer; must show all work / calculator inputs & cash flow diagrams • Overview of Finance • The difference between Value and Price • Return, ROR, Yield, Rate of Profit [Profit/Investment] • Chapter 5 • Explain why lenders charge interest • Define the components of interest rates (r = r*+IP+DRP+LP+MRP) • Know what a term structure of interest rates is • Define an interest rate Yield Curve • how to read it • what influences the shape of the yield curve • what the shape tells us about future interest rates • Make borrowing decisions using yield curve information • Explain the Opportunity Cost of Capital & why it’s important • Chapters 11&12 • Explain the Concept of Risk Aversion and Its Effects on Security Valuation and Return • Explain Coefficient of Variation and Use It To Make An Investment Decision • Explain Systematic Risk and Unsystematic Risk • Describe the Causes of Systematic Risk and Unsystematic Risk • Describe Diversification and How It Reduces the Riskiness of a Portfolio • Describe the CAPM Concept • Explain What Beta Is

  2. Test 1 Review Chapter 4 • Concept Questions • Future value (definition) • Present value (definition) • Compounding (definition) • Discounting (definition) • Explain Effective Annual Rate • Use Effective Annual Rate To Make a Borrowing or Investing Decision • The #1, all-important, never-to-be-forgotten process used to determine the theoretical/fair market value of any financial asset • rnominal, rperiodic • Types of Problems (work them any way you know how) • Find FV • Find PV • Find r • Find n • Annuities (ordinary & due) • Find PMT • Un-even cash flows • Perpetuities • EAR • Do all of the above using other-than-annual compounding • Perform All of the Above with Fractional (non-integer) Time Periods • Perform All of the Above in Cases Where Compounding Periods Per Year Aren't Equal To Payments Per Year • Be able to solve the above without the financial functions on your calculator (i.e. do the math)

  3. Test 1 Review Formulas ROR = Profit/Investment = (Sales Price –COGS)/COGS = (End Price – Begin Price) / Begin Price = (New – Old) / Old Cost of Money Nominal Interest Rate = r = r* + IP + DRP + LP + MRP Time Value of Money Discrete Compounding rperiodic = rnominal/m n = m x T FV = PV(1 + rnominal/m)n PV = FV / (1 + rnominal/m)n EAR = (1 + rnominal/m)m – 1 PVperpetuity = PMT / rperiodic Continuous Compounding FV = PVerT PV = FV / erT EAR = er – 1

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