FA-5.1 - 5.3: Investing Review

Front

What is the formula to calculate the future value of an investment?

Back

Future Value = Present Value × (1 + growth rate)^number of years.

Front

Define 'growth factor' in the context of investments.

Back

The growth factor is a multiplier that represents how much an investment grows over a specific period, calculated as (1 + growth rate).

Front

If an investment has a growth factor of 1.08, what does this indicate?

Back

It indicates that the investment grows by 8% each year.

Front

What is the difference between saving and investing?

Back

Saving is meant for short-term goals and typically involves lower risk, while investing is for long-term goals and usually involves higher risk.

Front

How do you determine the number of years required to reach a specific investment goal?

Back

Use the formula: number of years = log(future value / present value) / log(growth factor).

Front

What is a linear function in the context of savings?

Back

A linear function shows a constant rate of change, meaning the amount saved increases by the same amount each period.

Front

What is an example of an exponential growth scenario in investments?

Back

An investment that compounds interest, where the amount grows by a percentage of the current total each period.

Front

If you invest $1,000 at a growth factor of 1.05, how much will you have after 3 years?

Back

Future Value = $1,000 × (1.05)^3 = $1,157.63.

Front

What does it mean if an investment shows decay?

Back

It means the value of the investment is decreasing over time, often due to negative growth rates.

Front

What is the significance of rounding in financial calculations?

Back

Rounding ensures that financial figures are presented in a manageable format, often to the nearest cent or dollar.