Finance Exam Two

Discount Factor Equation

1/(1+r)^t

Growing Perpetuity

A growing stream of cash flows that continue forever

Growing Annuity

A growing stream of cash flows with a fixed annuity

Annuity

A series of equal cash flows for a finite period of time

Uneven Cash Flows

A series of uneven cash flows over a period of time

Annuity Due

An annuity when the 1st payment occurs at the beginning of the period

Ordinary Annuity

An annuity when the 1st payment occurs at the end of the period

Perpetuity

An annuity where the cash flows continue forever

The interest rate that is most commonly quoted by a lender is referred to as the:

Annual percentage rate

Interest on Interest

If you keep the interest you have earned in an account, you should expect that interest to make interest. This is called what?

Your aunt has promised to give you $5,000 when you graduate from college. You expect to graduate three years from now. If you speed up your plans to enable you to graduate two years from now, the present value of the promised gift will:

Increase

Compound Interest

Interest earned on both the initial principal and the interest reinvested from prior periods

Simple Interest

Interest only earned on the initial principle

Discount Factor

Represents the present value of one dollar

The interest earned on both the initial principal and the interest reinvested from prior periods is called:

Compound Interest

Cullen invested $5,000 five years ago and earns 6 percent annual interest. By leaving his interest earnings in her account, he increases the amount of interest he earns each year. His investment is best described as benefitting from:

Compounding

Andrew just calculated the present value of a $15,000 bonus he will receive next year. The interest rate he used in his calculation is referred to as the:

Discount Rate

Madelyn is calculating the present value of a bonus she will receive next year. The process she is using is called:

Discounting

An ordinary annuity is best defined as:

Equal payments paid at the end of regular intervals over a stated time period.

Time Value of Money

The idea that money is worth different at different periods of time

Annual Percentage Rate

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

Effective Annual Rate

The interest rate expressed if it were compounded once a year

Discount

The process of calculating the PV of future cash flows

Discounted Cash Flows

The process of calculating the present value of a future stream of cash

Discount Rate

The rate used to calculate the present value of future cash flows

Future Value

The value of an investment at some future period

Present Value

The value today of future cash flows discounted at the appropriate discount rate

Which one of the following statements correctly defines a time value of money relationship?

Time and present value are inversely related, all else held constant

Intrinsic Value

the discounted value of the cash that can be taken out of a business during its remaining life