Time Value of Money and Cash Flow Analysis

What type of interest rate is 10% per year, compounded monthly

• Nominal

• Actual

Answer explanation

Nominal interest rates are the rates that the banks typically state per year but actually have a different compounding period.

Where is the start of this cash flow pattern?

• Period 5

• Period 0

• Period 4

• Period 6

Answer explanation

Period 4!

Which factor would use?

• (F/P,i,N)

• (P/F,i,N)

• (F/A,i,N)

• (A/F,i,N)

Which cash flow diagram shows a Negative Base Annuity and a Positive Arithmetic Gradient?

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• 
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How many cash flow patterns are there in this cash flow diagram?

• 3

• 2

• 1

Answer explanation

1. 1. Negative annuity (red)

2. 2. Positive annuity (blue)

3. 3. Arithmetic gradient (green)

How many cash flow patterns are there in this cash flow diagram?

• 3

• 2

• 1

Answer explanation

1. 1. Geometric Gradient (Red)

2. 2. Standard Annuity (Blue

If you apply the (P/A, g, i, N) factor to the Geometric Gradient (red), where would you draw the resulting single receipt or present value?

• Period 4

• Period 5

• Time 0

• Period 6

Answer explanation

Period 5! at the start of the gradient.

If I know an interest rate per month, and I want to find an equivalent interest per 6 months, what equation do I use?

• Effective interest formula

• Compound interest formula

• Sub-period interest formulas

Answer explanation

The effective interest rate formula gives you an equivalent interest rate for any compound period that you want!