Chapter 5 Accounting II

compounding interest

the process of accumulating interest on an investment over time to earn more interest

simple interest

Interest earned only on the original principal amount invested

compound interest.

The interest earned on both the initial principal and the interest reinvested from prior periods is called:

discounted cash flow valuation.

The process of determining the present value of future cash flows in order to know their value today is referred to as:

future value

Assume you are investing $100 today in a savings account. Which one of the following terms refers to the total value of this investment one year from now?

In today's dollars, Caroline's award is worth more than Jiexin's.

Caroline is going to receive a award of $20,000 six years from now. Jiexin is going to receive an award of $20,000 nine years from now. Which one of the following statements is correct if both individuals apply a discount rate of 7 percent?

compounding

Cullen invested $5,000 five years ago and earns 6 percent annual interest. By leaving his interest earnings in her account, he increases the amount of interest he earns each year. His investment is best described as benefitting from:

discounting

Madelyn is calculating the present value of a bonus she will receive next year. The process she is using is called

could have deposited less money today and still had $5,000 in four years if the account paid a higher rate of interest.

Nirav just opened a savings account paying 2 percent interest, compounded annually. After four years, the savings account will be worth $5,000. Assume there are no additional deposits or withdrawals. Given this information, Nirav

increase

Your aunt has promised to give you $5,000 when you graduate from college. You expect to graduate three years from now. If you speed up your plans to enable you to graduate two years from now, the present value of the promised gift will:

discount rate

• is the rate used to calculate present value.