Chapter 5 Learn
If we know the interest rate is 10 percent per year and the money is invested for 10 years, then we can use the _____ to find the present value.
present value factor
Interest earned only on the original principal amount invested is called _____ interest.
simple
Interest earned only on the original principal amount invested is called __________ interest.
simple
When the future value formula is used to calculate growth rates, the assumption is that _____ growth rate is achieved each year.
the same
Using a time value of money table, what is the future value interest factor for 10 percent for 2 years?
1.21 Look under 10% until you get to 2 for two years. That number is 1.10.
Which of the following are correct spreadsheet functions?
Discount rate = RATE(nper,pmt,pv,fv) Future value = FV(rate,nper,pmt,pv) Present value = PV(rate,nper,pmt,fv)
Which of the following can be determined using the future value approach to compound growth developed in this chapter?
Dividend growth Sales growth
True or false: Small changes in the interest rate affect the future value of a small-term investment more than they would affect the value of a long-term investment.
False
True or false: The multi-period formula for future value using compounding is FV = (1 + r)t.
False
The basic present value equation is:
PV = FVt/(1 + r)^t
__________ value is the current value of future cash flows discounted at the appropriate discount rate.
Present
Future value is the Blank______ value of an investment at some time in the future.
cash
Discounting is the opposite of
compounding
The idea behind ______ is that interest is earned on interest.
compounding
The basic present value equation underlies many of the _____.
most important ideas in corporate finance
The equation that results in the Blank______ value interest factor for a single deposit is as follows: (1 + r)t
future
The discount rate is also called the rate of _________.
return
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.
All else equal, the longer time period you have before you will need the money, the _______ (less/more) you will need to deposit today to have the same amount in the future.
less
In general, if you invest for one period at an interest rate of r, your investment will grow to 1 __________ (minus/plus) r.
plus
If you want to know how much you need to invest today at 12 percent compounded annually in order to have $4,000 in five years, you will need to find a(n) _______ value.
present
The _____ value is the current value of future cash flows discounted at the appropriate discount rate.
present
Suppose present value is $100, future value is $1,000, and N is 10 years. Which formula below is used to find the (decimal) interest rate?
r = (1000/100)(1/10) - 1
If $100 earns compound interest for 2 years at 10 percent per year, the future value will be ____.
$121.00
The _________ (smaller/greater) the interest rate changes, the greater the impact to the future value of an amount invested.
$600; $605 Reason: With simple interest you will earn $500 X 0.10 = $50 each year. Your total will be $500+100=$600. With compound interest, you will have $500(1.10)2 = $605 at the end of the two years. Given the same rate of interest, the FV will always be higher with compound interest.
Which of the following is the correct mathematical formula for calculation of the future value of $100 invested today for 3 years at 10% per year?
FV = $100 × (1.10)3
What is the future value of $1,000 invested for 8 years at 6%?
$1,593.85
Which formula will you enter into a spreadsheet cell to determine how long it will take $40 to grow to $240 at an interest rate of 6.53% compounded annually?
=NPER(0.0653,0,−40,240)
True or false: When using the time value of money features of a financial calculator, you should key in the interest rate as a decimal.
False
The formula for a present value factor is 1(1+r)t11+rt.
True
True or false: Given the same rate of interest, more money can be earned with compound interest than with simple interest.
True
True or false: The correct future value interest factor in a time value of money table for $1 in 10 years at 10 percent per year is 2.5937.
True
What is the future value of $100 compounded for 50 years at 10 percent annual interest?
$11,739.09
If you invest for a single period at an interest rate of r, your money will grow to ______ per dollar invested.
(1+r)
Which formula below represents a present value factor?
1/(1 + r)t
The process of leaving your money and any accumulated interest in an investment for more than one period, thereby reinvesting the interest, is called _____
compounding
The _____ rate is the rate used to calculate the present value of the future cash flows.
discount
Calculating the present value of a future cash flow to determine its value today is called _____.
discounted cash flow valuation
__________ value is the cash value of an investment at some time in the ____________
future, future
The greater the number of time periods, the ___________ (smaller/greater) the impact of compounding.
greater
The difference between _______ interest and compound interest is that the amount of compound interest earned gets (bigger or smaller) ___________ every year.
simple; bigger
Assuming the interest rate offered for a 10-year investment plan is same as for a 4-year investment plan. For an investor to achieve the same future value, which of these two plans would require a smaller savings amount to be deposited today?
10-year investment
Suppose you want to save $10,000 to buy a car. You have $6,000 to deposit today and you can earn 6% on your investments. You want to know when you'll have enough to buy the car. Which of the following spreadsheet functions will solve the problem?
=NPER(0.06,0,−6000,10000)
Which of the following methods can be used to calculate present value?
A time value of money table A financial calculator An algebraic formula
The concept of the time value of money is based on the principle that a dollar today is worth __________ a dollar promised at some time in the future.
more than
The equation that results in the ______ value interest factor for a single deposit is as follows: 1(1+r)t
present
Interest earned on the original principal amount invested is called _____.
simple interest
