What happens to the Present Value (PV) when the interest rate goes up?
PV goes down.
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| Term | Definition |
|---|---|
| What happens to the Present Value (PV) when the interest rate goes up? | PV goes down. |
| What happens to the Future Value (FV) when the interest rate goes up? | FV increases because your money grows faster. |
| What’s the relationship between bond prices and interest rates? | Inverse — when rates rise, bond prices fall. |
| What is the formula for future value (FV)? | FV=PV(1+r)n |
| If payments start 3 years from now, what do you do first? | Find the PV at the time payments start, then discount that amount back to today. |
| What variables can you solve for in time value of money problems? | PV, FV, PMT (payment), N (number of periods), or I/Y (interest rate). |
| What happens to FV when compounding frequency increases? | FV increases because interest is earned more often. |
| If interest is 10% annually but compounded semi-annually, what’s I/Y per period? | 5% per half-year. |
| How do you convert an annual rate to a monthly rate? | Divide by 12. |
| How do you find the remaining balance after some payments? | Find the PV of the remaining payments. |
| When are payments made in an ordinary annuity? | At the end of each period. |
| When are payments made in an annuity due? | At the beginning of each period. |
| Which has a higher PV, ordinary annuity or annuity due? | Annuity due (you get money sooner). |
| What are the main types of bonds? | Console (Perpetuity) – pays interest forever. Zero-Coupon Bond – no annual interest; sold at a discount. Fixed-Coupon Bond – pays a set interest each year until maturity. |