Unit 2 - Learnsmart

If FV= PV x (1+r) is the single period formula for a future value, which of the following is the single period present value formula?

PV = FV/(1+r)

What is the correct formula for calculating present value of a future amount, expected t years at r percent interest

PV = FV/(1+r)^t

If you invest $500 for one year at a rate of 8% per year, how much interest will you earn?

$40

Which of the following is the general formula for the EAR when M is the number of times interest is compounded in a year?

(1+quoted rate/m)^m - 1

For a stated positive interest rate, the EAR is always ___ the APR

equal to or greater than

A dollar received one year from today has __ value than a dollar received today

less a dollar received one year from today has less value than a dollar received today

An ordinary annuity consists of a ___ stream of cash flows for a fixed period of time

level

The concept of the time value of money is based on the principe that a dollar today is worth __ a dollar promised at some time in the future.

more than

The present value of an annuity due is equal to the present value of an ___ annuity multiplied by (1+r)

ordinary

The future value of a $100 investment in 4 years compounded at 8% per year equals ___.

$136.05

True or False, the formula for a present value factor is 1/(1+r)^2

True This is the present value interest factor, not the present value itself. In order to get PV, you need to multiply FV by this factor.

The most common way to repay a loan is to pay

a single fixed payment every period

Future value is that ___ value of an investment at some time in the future.

cash

The amount an investment is worth after one or more periods is called the ___ value.

future

The general formula for ____ is (1+quoted rate/m)^m - 1

the EAR

A perpetuity is a constant stream of cash flows for an ____ period of time

infinite

Amortization is the process of paying off loans by regularly reducing the ___

principal

If you invest $100 at 10 percent compounded annually, how much money will you have at the end of 3 years?

$133.10 FV= 100 x 1.10^3 = 133.10

To calculate the future value of $100 invested for t years at r interest rate, you enter the present value in your calulator as a negative number. Why?

Because the $100 is an outflow from which should be negative

What is the multi-period formula for compounding a present value into a future value?

FV = PV x (1xr)^2

The idea behind ____ is that interest is earned on interest.

compounding

Calculating the present value of a future cash flow to determine its worth today is commonly called __ valuation.

discounted cash flow (DCF)

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. Inflation will make a dollar in the future worth less than a dollar today.

Future value must be discounted, present value must be compounded

False

If the future value factor for $1 invested for 5 years at 10% is ___ then the corresponding present value factor for $1 received in 5 years with a 10% discount rate is___

1.611; .6209

You must invest ____ today at 8% to get $2 in one year (round your answer to two decimal places)?

1.85

Suppose we invest $100 now and recieve $259.37 in 10 years. What rate of interest will we achieve?

10% ($259.37/$100)^1/10 - 1 = 10%

If a firm's sales are growing at 5% per year, how long will it take for a firm's sales to triple?

22.5 years Assume sales are $1. Use the financial calculator to solve for how long it will take for sales to grow to $3 at 5%. PV = -1, 1/Y=5, FV=3 Solve for N

If you wish to find the future value of $100 invested at 10% for 5 years, which of the following would be the correct excel function?

=FV(0.10,5,0,-100)

If you want to know how much you need to invest today at 12% compounded annually in order to have $4,000 in five years, you will need to find a(n) ___ value.

Present

If you borrow $15,000 today at 5% annual interest to be repaid in one year as a lump sum, this is termed a ___

Pure discount loan

T or F: The formula for the annuity present value factor is {1-[1/(1+r)^t]}/r

True

The interest rate charged per period multiplied by the number of periods per year is the

annual percentage rate

The interest rate expressed as if it were compounded once per year is called the

effective annual rate

We measure future value at the ___ of the period

end