FIN 370 Chapter 5
A dollar received one year from today has ____ value than a dollar received today. -less -more -the same
less
T or F: Given the same rate of interest, more money can be earned with compound interest than with simple interest.
true
The variable that you are solving for in present value of a lump sum problem is: -payments -time period -future value -present value -interest rate
present value
Which one 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 x (1.10)^3
The variables present value of a lump sum problem include all of the following except: -Free cash flow -Present value -Time period -Interest rate
Free cash flow
The basic present value equation is:
PV = FVt/(1 + r)^t
How would a decrease in the interest rate effect the future value of a lump sum, single amount problem (all other variables are the same)? -decrease the present value -decrease the future value -increase the future value -increase the present value -increase the time needed to save
decrease the future value
T or F: The multi-period formula for future value using compounding is FV = (1 + r)^t
false Reason: FV = PV x (1 + r)^t
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. -idealistic -future -present -past
present
The discount rate is also called the rate of ____________.
return
Interest earned only on the original principal amount invested is called ______ interest.
simple
Interest earned on the original principal amount invested is called ______. -simple interest -compound interest -interest yield
simple interest
The difference between __________ interest and compound interest is that the amount of compound interest earned gets (bigger/smaller) ____________ every year. -simple; bigger -discount; bigger -interest; smaller
simple; bigger
Why is a dollar received today worth more than a dollar received in the future? -A dollar will be worth as much in the future as it is today -A dollar today is not worth more than a dollar in the future -Today's dollar can be reinvested, yielding a greater amount in the future
today's dollar can be reinvested, yielding a greater amount in the future
__________ value is the cash value of an investment at some time in the __________.
future, future
What is the future value of $100 compounded for 50 years at 10 percent annual interest?
$11,739.09 FV: $100 x 1.10^50 = $11.739.09
If $100 earns compound interest for 2 years at 10 percent per year, the future value will be ______.
$121.00 FV: $100 x 1.10^2 = $121
If you invest $100 at 10 percent compounded annually, how much money will you have at the end of 3 years?
$133.30 FV: $100 x 1.10^3=$133.30
You invest $500 at 10 percent interest. At the end of 2 years with simple interest you will have _____ and with compound interest you will have ____.
$600; $605 Simple interest: $500 x 0.10 = $50 $500 + $100 = $600 Compound interest: $500(1.10)^2 = $605
Which formula below represents a present value factor?
1/(1 + r)^t
Future value is the __________ value of an investment at some time in the future. -indirect -interest -cash -relational
cash
The idea behind _________ is that interest is earned on interest. -rebounding -simplification -compounding -reinsurance
compounding
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/compound
How would a decrease in the interest rate effect the present value of a lump sum, single amount problem (all other variables remain the same)? -decrease the present value -increase the time needed to save -increase the present value -change the future value
increase the present value
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. -the same as -less than -more than
more than
The variables in a future value lump sum problem include all of the following except: -payments -interest rate -future value -time period
payments
The variables in a present value of a lump sum problem include all of the following, except: -present value -payments -interest rate -time period
payments
The variables in a future value of a lump sum problem include all of the following, except: -annuity payments -time period -future value -interest rate
annuity payments
The variable that you are solving for in a future value of a lump sum problem is: -present value -time period -future value -payments
future value