finance ch.3
To calculate the future value of $100 invested for t years at r interest rate, you enter the present value in your calculator as a negative number. Why?
Because the $100 is an outflow from you which should be negative.
Using the PV, discount rate, and , ___ you can determine the number of periods. (Enter abbreviation only.)
FV
True or false: The process of leaving your money and any accumulated interest in an investment for more than one period is called multiplied interest.
False
True or false: When entering the interest rate in a financial calculator, you should key in the interest rate as a decimal.
False
If you invest for a single period at an interest rate of r, your money will grow to ______ per dollar invested.
(1+r)
If FV= PV x (1+r) is the single period formula for future value, which of the following is the single period present value formula?
PV = FV/(1+r)
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.
Future value is the ________ value of an investment at some time in the future.
cash
The idea behind ______ is that interest is earned on interest.
compounding
In a present value equation, the _____ rate (r) can be found using the PV, FV, and t. (Enter one word per blank.)
discount
Calculating the present value of a future cash flow to determine its worth today is commonly called ___________ valuation.
discounted cash flow (DCF)
True or false: Future value refers to the amount of money an investment is worth today.
false
The present value is the current value of the ____ cash flows discounted at the appropriate discount rate.
future
When dealing with compound interest, it is more financially advantageous to have a _____ time horizon for investment.
longer
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 current value of a future cash flow discounted at the appropriate rate is called the _____ value.
present
With ____ interest, the interest is not reinvested.
simple
True or false: Given the PV, FV, and life of the investment, you can determine the discount rate.
true
Which of the following is the multi-period formula for compounding a present value into a future value?
FV = PV×(1 + r)^t
The basic present value equation is:
PV=FVt/(1+r)^t
True or false: If you invest for two periods at an interest rate of r, then your money will grow to (1 + r) per dollar invested.
false
True or false: The present value is the sum of all expenses in a project.
false
The amount an investment is worth after one or more periods is called the _____ value.
future
Given an investment amount and a set rate of interest, the _____ the time horizon the _____ the future value.
longer; greater
FV=PVx(1+r)^t
solution
If you invest at a rate of r for _____ periods, under compounding, your investment will grow to (1+r)2 per dollar invested.
2
Which of the following is the correct Excel function to calculate the present value of $300 due in 5 years at a discount rate of 10%?
=PV(0.10,5,0,-300)
Which of the following methods are used to calculate present value?
A time value of money table A financial calculator An algebraic formula
Future value is the _____ value of an investment at some time in the future.
cash
True or false: Given the PV, FV, and payment amount, you can determine the number of periods.
false
For a given time period (t) and interest rate (r), the present value factor is _______ the future value factor. (Select all that apply.)
the reciprocal of 1 divided by
The real world has moved away from using _____________________________ for calculating future and present values.
time value of money tables
True or false: If you invest at a rate of r for two periods, under compounding, your investment will grow to (1+r)2 per dollar invested.
true
What is the primary difference between time value of money data entries in your calculator and in a spreadsheet function?
The interest rate in your calculator is entered as a whole number while in the spreadsheet function it is entered as a decimal.
The process of accumulating interest in an investment over time to earn more interest is called _________.
compounding
Time value of money tables are not as common as they once were because:
it is easier to use inexpensive financial calculators instead they are available for only a relatively small number of interest rates.
With discounting, the resulting value is called the _____ value; while with compounding the result is called the ____ value.
present; future
Using a time value of money table, what is the future value interest factor for 20 percent for 2 years?
1.4400
Which formula below represents a present value factor?
1/(1+r)^t
Using a time value of money table, what is the future value interest factor for 10 percent for 2 years?
1.21
