Core Concepts

Question 1

Financial Modeling

Answer 1

• helps INFORM your decision
• quantifies views on a co & back up arguments w/ actual numbers
  –> use to advise client and/or make investment decision

Question 2

Time Value of Money

Answer 2

(same amount of) MONEY TODAY IS WORTH MORE THAN (same amount of) MONEY TOMORROW
- can invest that same amount of money today and end up with more in the future
–> “same amount” of money in the future is worth less than it is today
==> must discount future value to its present value

Question 3

Opportunity cost

Answer 3

• paying more money upfront –> can’t invest that money elsewhere & earn on it = opportunity cost
• what you can earn in similar investments elsewhere

Question 4

Investment decisions boil down to: Would you earn MORE w/ this investment than you could earn on similar investments elsewhere? Or would you earn LESS?

Answer 4

• consider: 1) opportunity cost yield (on another investment) and 2) risk profile (is it similar investment?)
• assess potential returns (how much you could earn w/ this investment) vs. your opp cost (how much you could earn elsewhere w/ other, similar investments)
  –> if potential returns > opp cost -> invest
  –> if potential returns < opp cost -> do not invest

Question 5

Present Value

Answer 5

• linked to 1) yield on investment (how much you earn) and 2) your opportunity cost

Question 6

Future Value - formula

Answer 6

FV = PV * (1+r)^n

r = discount rate
n = future periods

• must discount future money to its value today (what is money i will receive in the future worth TODAY?)
  –> depends on opportunity cost (r)

Question 7

Discount rate

Answer 7

• opportunity cost

Question 8

Difference between value of money today and money today - depends on what?

Answer 8

• opportunity cost: how much you could earn w/ other, similar investments
  –> If low opp cost: money today won’t be worth THAT much more; if high opp cost: money today will be worth a lot more

Question 9

How to