Chapter 4: Introduction to Valuation: The Time Value of Money
Using the PV, discount rate, and _______, you can determine the number of periods.
FV
True or false: Given the PV, FV, and payment amount, you can determine the number of periods.
False
FV = ______× (1 + r)^t
PV
Which of the following is the correct formula for calculating the present value of a future amount, expected in t years at r percent interest?
PV = FV/(1 + r)t
True or false: Future value refers to the amount of money an investment is worth today.
false
The amount an investment is worth after one or more periods is called the ______ value.
future
Future value is the value of an investment at some time in the future.
monetary
The concept of the time value of money is based on the principle that a dollar today is worth Blank______ a dollar promised at some time in the future.
more than
Future value is the Blank______ value of an investment at some time in the future.
cash
The idea behind______ is that interest is earned on interest.
compounding
If you invest for a single period at an interest rate of r, your money will grow to Blank______ per dollar invested.
(1+r)
Which formula below represents a present value factor?
1/(1 + r)t
Which of the following is the multi-period formula for compounding a present value into a future value?
FV = PV × (1 + r)t
True or false: When entering the interest rate in a financial calculator, you should key in the interest rate as a decimal.
False
True or false: Given the PV, FV, and life of the investment, you can determine the discount rate.
True
Which of the following methods are used to calculate present value?
- a time value of money table - an algebraic formula - a financial calculator
Time value of money tables are not as common as they once were because:
- it is easier to use inexpensive financial calculators instead. - they are available for only a relatively small number of interest rates.
Which of the following are the primary as well as easy ways used to perform financial calculations today?
- spreadsheet functions - financial calculator
True or false: If you invest at a rate of r for two periods, under compounding, your investment will grow to (1 + r)2 per dollar invested.
True
True or false: The formula for a present value factor is 1/(1+r)t1/1+rt.
True
True or false: If you invest for two periods at an interest rate of r, then your money will grow to (1 + r) per dollar invested.
false
The current value of a future cash flow discounted at the appropriate rate is called the Blank______ value.
present
If you invest at a rate of r for periods, under compounding, your investment will grow to (1 + r)2 per dollar invested.
two
To calculate the future value of $100 invested for t years at r interest rate, you enter the present value in your calculator as a negative number. Why?
because the $100 is an outflow from you which should be negative
The process of accumulating interest in an investment over time to earn more interest is called ______.
compounding
In a present value equation, the rate (r) can be found using the PV, FV, and t.
discount
Calculating the present value of a future cash flow to determine its worth today is commonly called Blank______ valuation.
discounted cash flow (DCF)
Why is a dollar received today worth more than a dollar received in the future?
Today's dollar can be reinvested, yielding a greater amount in the future.
