Ch. 5 - The Time Value of Money
formula for present value factor
1/(1+r)^t
t/f discounting is the opposite of compounding
true
if you invest for a single period of at an interest rate of r, your money will grow to ____ per dollar invested
(1+r)
if you invest 100 at 10% simple interest how much will you have in 10 years
200
you invest $500 at 10% interest. at the end of 2 years with simple interest you will have ____ and with compound interest you will have ____
600;605 with simple interest you will earn 500x0.10=50. your total will be 500+100=600. with compound interest you will have 500(1.10)^2= 605 at the end of two years
which of the following can be determined using the future value approach to compound growth developed in this chapter. check all that apply a. population growth b. erratic growth c. sales growth d. dividend growth
a,c,d
which of the following would result in a higher future value a - 12% for 10 years b - 12% for 12 years
b because the rates are the same, b would give a higher future value because on additional period of interest is earned
Future value is the _____ value of an investment at some point in the future
cash
the idea behind _____ is that interest is earned on interest
compounding
t/f small changes in the interest rate do not really matter when dealing with millions or billions of dollars over 30 or 40 years
false
t/f when using the time value of money features on a financial calculator, you should key in the interest rate as a decimal
false!!!!
a dollar received one year from today has ____ value than a dollar received today
less
the basic present value equation underlies may of the
most important ideas in corporate finance
suppose pv = 100 and fv=1000 and n=10. which formula is used to find the interest rate
r= (1000/100)^(1/10)-1
the difference between a _____ interest and compound interest is that compound interest (increase/decreases) ______ with time
simple; increases
t/f given the same rate of interest, more money can be earned with compound interest rather than with simple interest
true