Finance 409 Quiz #1

Why does a time line need at least one negative and one positive cash flow? A) Because deposits earn a positive rate of interest. B) You must give in order to receive. C) To compensate for the time value of money. D) You don't need at least one of each.

B) You must give in order to receive.

Which of the following statements is correct? A. $100 to be received in the future is worth more than that today since it could be invested and earn interest. B. $100 to be received in the future is worth less than that today since it could be invested and earn interest. C. The Rule of 72 calculates the compounded return on investments. D. Discounting is finding the future value of an original investment.

B. $100 to be received in the future is worth less than that today since it could be invested and earn interest.

Which of the following is NOT true when developing a time line? A. Cash inflows are designated with a positive number. B. Cash outflows are designated with a positive number. C. The cost is known as the interest rate. D. The time line shows the magnitude of cash flows at different points in time.

B. Cash outflows are designated with a positive number.

You invested $1000 for 5 years in an account that earns 5%. However, today you learn that you are able to move the account into an investment that earns 10%. Which of the following statements is correct? A. If you select the investment earning 10%, you will double your profit. B. If you select the investment earning 10%, you will more than double your profit. C. If you select the investment earning 10%, your profit will be less than double. D. None of these statements is correct.

B. If you select the investment earning 10%, you will more than double your profit.

We call the process of earning interest on both the original deposit and on the earlier interest payments _______________. A. simple interest B. compounding C. future value D. discounting

B. compounding

When your investment compounds, your money will grow in a(n) __________ fashion. A. linear B. exponential C. static D. implied

B. exponential

With regard to money deposited in a bank, future values are: A. smaller than present values. B. larger than present values. C. equal to future values. D. are completely independent of present values.

B. larger than present values.

The longer money can earn interest, A. the greater the interest earned on the original deposit exceeds the interest-on-interest. B. the greater the compounding effect. C. the greater the present value must be to reach a financial goal. D. the greater the risk to the investor of not reaching a financial goal.

B. the greater the compounding effect.

Which of the following investments would you prefer? A. An investment earning 10% for 20 years B. An investment earning 8.5% for 20 years C. An investment earning 5% for 40 years D. An investment earning 3% for 40 years

C. An investment earning 5% for 40 years

Time value of money concepts can be used by _____________. A. Individuals doing personal financial planning B. CFOs and CEOs to make business decisions C. Investors calculating a return on an investment D. All of these are users of time value of money concepts.

D. All of these are users of time value of money concepts.

Which of the following statements is incorrect with respect to time lines? A. A helpful tool for organizing our analysis is the time line. B. Cash flows we receive are called inflows are denoted with a positive number. C. Cash flows we pay out are called outflows are designated with a negative number. D. Interest rates are not included on our time lines.

D. Interest rates are not included on our time lines.

. Which of the following will not increase a present value? A. Increase the interest rate. B. Decrease the number of periods. C. Increase the future value. D. None of these answers is correct.

A. Increase the interest rate.

How are present values affected by changes in interest rates? A. The lower the interest rate, the larger the present value will be. B. The higher the interest rate, the larger the present value will be. C. Present values are not affected by changes in interest rates. D. One would need to know the future value in order to determine the impact.

A. The lower the interest rate, the larger the present value will be.

The interest rate, i, which we use to calculate present value, is often referred to as the: A. discount rate. B. multiplier. C. compound rate. D. dividend.

A. discount rate.

The process of figuring out how much an amount that you expect to receive in the future is worth today is called: A. discounting. B. multiplying. C. compounding. D. computing.

A. discounting.

When computing the rate of return from selling an investment, the number of years between the present and future cash flows is an important factor in determining: A. the annual rate earned. B. the annual payments required. C. whether the present value or the future value is a cash inflow. D. whether the present value or the future value is a cash outflow.

A. the annual rate earned.

. People borrow money because they expect: A. their purchases to give them the satisfaction in the future that compensates them for the interest payments charged on the loan. B. the time value of money to apply only if they are saving money. C. interest rates to rise. D. that consumers don't need to calculate the impact of interest on their purchases.

A. their purchases to give them the satisfaction in the future that compensates them for the interest payments charged on the loan.

How are future values affected by changes in interest rates? A. The lower the interest rate, the larger the future value will be. B. The higher the interest rate, the larger the future value will be. C. Future values are not affected by changes in interest rates. D. One would need to know the present value in order to determine the impact.

B. The higher the interest rate, the larger the future value will be.

. Moving cash flows from one point in time to another requires us to use A. only present value equations. B. only future value equations. C. both present value and future value equations. D. the Rule of 72.

C. both present value and future value equations.

We call the process of earning interest on both the original deposit and on the earlier interest payments: A. discounting. B. multiplying. C. compounding. D. computing.

C. compounding.

A dollar paid (or received) in the future is A. worth more than a dollar paid (or received) today. B. worth as much as a dollar paid (or received) today. C. not worth as much as a dollar paid (or received) today. D. not comparable to a dollar paid (or received) today.

C. not worth as much as a dollar paid (or received) today.

When calculating the number of years needed to grow an investment to a specific amount of money, A. the lower the interest rate, the shorter the time period needed to achieve the growth. B. the higher the interest rate, the shorter the time period needed to achieve the growth. C. the interest rate has nothing to do with the length of the time period needed to achieve the growth. D. the Rule of 72 is the only way to calculate the time period needed to achieve the growth.

B. the higher the interest rate, the shorter the time period needed to achieve the growth.

. You double your money in 5 years. The reason your return is not 20% per year is because ___. A. it is probably a "fad" investment B. it does not reflect the effect of discounting C. it does not reflect the effect of the Rule of 72 D. it does not reflect the effect of compounding

D. it does not reflect the effect of compounding

The Rule of 72 is a simple mathematical approximation for: A. the present value required to double an investment. B. the future value required to double an investment. C. the payments required to double an investment. D. the number of years required to double an investment.

D. the number of years required to double an investment.