Finance Chapter 5: Time Value of Money

The future value of an annuity due will: A ) exceed the future value of an ordinary annuity (assuming all else equal). B ) be equal to the future value of an ordinary annuity (assuming all else equal). C ) be less than the future value of an ordinary annuity (assuming all else equal).

A ) exceed the future value of an ordinary annuity (assuming all else equal).

The effective annual rate of interest is: A ) greater than or equal to the nominal interest rate. B ) always equal to the nominal interest rate. C ) less than or equal to the nominal interest rate.

A ) greater than or equal to the nominal interest rate.

The future value of a single sum will: A ) increase if the interest rate increases. B ) be unchanged if the interest rate changes C ) decrease if the interest rate increases

A ) increase if the interest rate increases.

Disregarding risk, if money has time value, the present value of a given sum: A ) will be less than its future value B ) will be greater than its future value C ) may be less than or greater than its future valu

A ) will be less than its future value

Which of the following is the best description of the relationship between present and future values? A ) PV = FV + (interest earned) B ) FV - PV = (interest earned) C ) PV/FV = (interest earned) D ) PV - FV = (interest earned)

B ) FV - PV = (interest earned)

The present value of a perpetuity cannot be found since it is an annuity that goes on forever. A ) True B ) False

B ) False

The present value (future value) of an uneven cash flow stream is the sum of the present values (future values) of each of the individual cash flows. xD; A ) False B ) True C ) False

B ) True

The present value of a single sum to be received in the future: A ) increases as the interest rate (discount rate) increases. B ) is unaffected when the interest rate (discount rate) changes C ) decreases as the interest rate (discount rate) increases

C ) decreases as the interest rate (discount rate) increases

The present value of a sum due in the future: A ) increases as the years to receipt increases. B ) is unaffected as the years to receipt increases C ) decreases as the years to receipt increases

C ) decreases as the years to receipt increases

The rate of return on the best available investment of equal risk is called: A ) discounting B ) compounding C ) the opportunity cost rate D ) time lines

C ) the opportunity cost rate

The __________ is the true interest rate earned over a one-year period. It is the actual change expected over the one-year period. A ) annual percentage rate (APR) B ) nominal interest rate C ) quoted interest rate D ) effective annual interest rate

Correct Answer: D ) effective annual interest rate

Which of the following investment opportunities would yield the highest return? A ) Quoted annual rate of 6% with annual compounding. B ) Quoted annual rate of 6% with semi-annual compounding. C ) Quoted annual rate of 6% with quarterly compounding. D ) Quoted annual rate of 6% with monthly compounding.

D ) Quoted annual rate of 6% with monthly compounding.

True or False: The present value of a perpetuity cannot be found since it is an annuity that goes on forever.

False

True or False: FV = PV + interest earned

True

True or False: The present value (future value) of an uneven cash flow stream is the sum of the present values (future values) of each of the individual cash flows.

True

A partial amortization loan requires a final larger than usual payment that is called:

a balloon payment.

A loan that is repaid in equal payments over its life with each payment including a portion of interest and principal is

an amortized loan

The present value of a sum due in the future ________ as the years to receipt increases.

decreases

The process of finding the present value of a cash flow or a series of cash flows is called:

discounting.

The __________ is the true interest rate earned over a one-year period. It is the actual change expected over the one-year period.

effective annual interest rate

Comparisons of investment alternatives with different compounding periods should be made based on the:

effective annual interest rate.

The future value of an annuity due will be _________ than the future value of an ordinary annuity (assuming all else equal)

greater

The effective annual rate of interest is:

greater than or equal to the nominal interest rate.

The future value of a single sum will ______ if the interest rate increases.

increase

Disregarding risk, if money has time value, the present value of a given sum will be _________ than its future value.

less

The rate of return on the best available investment of equal risk is called:

the opportunity cost rate