Chapter5
Compound interest is when you earn interest on only the money you've saved. True or False
False
If the discount (or interest) rate is positive, the present value of an expected series of payments will always exceed the future value of the same series. True or False
False
Starting to invest early for retirement reduces the benefits of compound interest. True or False
False
The concept of the time value of money can not help guide investment decisions. True or False
False
Time Value of Money does not allow investors to make a more informed decision about what to do with their money. True or False
False
A perpetuity is simply an annuity with an extended life True or False
True
A time line is meaningful even if all cash flows do not occur annually. True or False
True
Disregarding risk, if money has time value, it is impossible for the present value of a given sum to exceed its future value. True or False
True
If a bank compounds savings accounts quarterly, the effective annual rate will exceed the nominal rate. True or False
True
Semiannual compounding is the process of determining the final value of a cash flow or series of cash flows when interest is added twice a year. True or False
True
Starting to invest early for retirement increases the benefits of compound interest. True or False
True
The PV shows the value of cash flows in terms of today's purchasing power. True or False
True
The nominal annual interest rate (INOM), or just the nominal rate is the rate quoted by banks, brokers, and other financial institutions. True or False
True
The periodic rate (IPER) is the rate charged by a lender or paid by a borrower each period. True or False
True
The time value of money means that a sum of money is worth more now than the same sum of money in the future. True or False
True
Which of the following statements is CORRECT? a.Time lines can be constructed where some of the payments constitute an annuity but others are unequal and thus are not part of the annuity. b.Time lines can only be constructed for annuities where the payments occur at the end of the periods, i.e., for ordinary annuities. c.A time line is not meaningful unless all cash flows occur annually. d.Time lines cannot be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly. e.Time lines are not useful for visualizing complex problems prior to doing actual calculations.
a. Time lines can be constructed where some of the payments constitute an annuity but others are unequal and thus are not part of the annuity.
Your bank account pays a 6% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT? a.The periodic rate of interest is 1.5% and the effective rate of interest is greater than 6%. b.The periodic rate of interest is 6% and the effective rate of interest is also 6%. c.The periodic rate of interest is 6% and the effective rate of interest is greater than 6%. d.The periodic rate of interest is 3% and the effective rate of interest is 6%. e.The periodic rate of interest is 1.5% and the effective rate of interest is 3%.
a.The periodic rate of interest is 1.5% and the effective rate of interest is greater than 6%.
Your bank account pays an 8% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT? a.The periodic rate of interest is 2% and the effective rate of interest is 4%. b.The periodic rate of interest is 2% and the effective rate of interest is greater than 8%. c.The periodic rate of interest is 4% and the effective rate of interest is less than 8%. d.The periodic rate of interest is 8% and the effective rate of interest is also 8%. e.The periodic rate of interest is 8% and the effective rate of interest is greater than 8%.
b.The periodic rate of interest is 2% and the effective rate of interest is greater than 8%.
You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would lower the calculated value of the investment? a.The riskiness of the investment's cash flows decreases. b.The total amount of cash flows remains the same, but more of the cash flows are received in the earlier years and less are received in the later years. c.The discount rate decreases. d.The discount rate increases. e.The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the annuity lasts for only 5 rather than 10 years, hence that each payment is for $20,000 rather than for $10,000.
d. The discount rate increases.
You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would increase the calculated value of the investment? a.The total amount of cash flows remains the same, but more of the cash flows are received in the later years and less are received in the earlier years. b.The discount rate increases. c.The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the annuity lasts for 10 years rather than 5 years, hence that each payment is for $10,000 rather than for $20,000. d.The discount rate decreases. e.The riskiness of the investment's cash flows increases.
d.The discount rate decreases.
