FIN701 - Module 2-2

Which one of the following will produce the lowest present value interest factor?

8 percent interest for I 0 years

According to the Rule of 72, you can do which one of the following?

Approximately double your money in 11 years at 6.55 percent interest Explanation: r = 72/11 r = 6.55%

Which one of these will increase the present value of a set amount to be received sometime in the future?

Decrease in the interest rate

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?

Future value

Phillippe invested $1,000 ten years ago and expected to have $1,800 today He has neither added nor withdrawn any money since his initial investment. All interest was reinvested and compounded annually. As it turns out, he only has $1,680 in his account today. Which one of the following must be true?

He earned a lower interest rate than he expected.

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

In today's dollars, Chang Lee's money is worth more than Soo Lee's

Which one of the following statements correctly defines a time value of money relationship?

Time and present value are inversely related, all else held constant.

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

compound interest

Christina invested $3,000 five years ago and earns 2 percent annual interest. By leaving her interest earnings in her account, she increases the amount of interest she earns each year. The way she is handling her interest income is referred to as:

compounding.

Steve just computed the present value of a $ 10,000 bonus he will receive next year. The interest rate he used in his computation is referred to as the:

discount rate

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

discounted cash flow valuation

Terry is calculating the present value of a bonus he will receive next year. The process he is using is called:

discounting

Art invested $100 two years ago at 8 percent interest. The first year, he earned $8 interest on his $100 investment. He reinvested the $8. The second year, he earned $8.64 interest on his$108 investment. The extra $.64 he earned in interest the second year is referred to as:

interest on interest.

An ordinary annuity is best defined as:

equal payments paid at the end of regular intervals over a stated time period

Your grandmother has promised to give you $ 10,000 when you graduate from college. If you speed up your graduation by one year and graduate two years from now rather than the expected three years, the present value of this gift will:

increase

Your goal is to have $1 million in your retirement savings on the day you retire. To fund this goal, you will make one lump sum deposit today. If you plan to retire ___ rather than ___ and earn a ___ rate of interest, then you can deposit a smaller lump sum today.

later; sooner; high

Kurt won a lottery and will receive $1,000 a year for the next 50 years. The current value of these winnings is called the:

present value

A perpetuity is defined as:

unending equal payments paid at equal time intervals.