FINC 3310 Chapter 4

If you invest for a single period at an interest rate of r, your money will grow to ______ per dollar invested.

(1 + r)

Jenny needs to borrow $5,500 for four years. The loan will be repaid in one lump sum at the end of the loan term. Which one of the following interest rates is best for Jenny?

(x) 6.5 percent simple interest 6.5 percent interest, compounded annually 6.6 percent simple interest 6.75 percent interest, compounded annually 6.80 percent interest, compounded annually

Using a time value of money table, what is the future value interest factor for 10% for 2 years?

1.21

Using a time value of money table, what is the future value interest factor for 20 percent for 2 years?

1.44

Which formula below represents a present value factor?

1/(1 + r)t

If you invest at a rate of r for ___ periods, under compounding, your investment will grow to (1 + r)^2 per dollar invested.

2

Rob wants to invest $15,000 for 7 years. Which one of the following rates will provide him with the largest future value?

3 percent simple interest 3 percent interest, compounded annually 2 percent interest, compounded annually 4 percent simple interest (x) 4 percent interest, compounded annually

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

PV = FV/(1 + r)t

The basic present value equation is ______.

PV = FVt/(1 + r)t

Which of the following is the correct Excel function to calculate the present value of $300 due in five years at a discount rate of 10 percent?

PV(0.10,5,0,-300)

The future value of a lump-sum investment will increase if you:

decrease the interest rate. decrease the number of compounding periods. (x) increase the time period. decrease the time period. decrease the lump-sum amount.

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

True or false: The formula for a present value factor is 1/(1+r)t.

true

future value (fv)

The amount an investment is worth after one or more periods. "Later" money on a time line.

present value (pv)

The current value of future cash flows discounted at the appropriate discount rate. Value at t = 0 on a time line.

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.

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.

Which of the following methods are used to calculate present value?

a time value of money table a financial calculator an algebraic formula

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

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

Jamie earned $14 in interest on her savings account last year. She has decided to leave the $14 in her account so that she can earn interest on the $14 this year. The interest earned on last year's interest earnings is called:

interest on interest

A dollar received one year from today has ______ value than a dollar received today.

less

When dealing with compound interest, it is more financially advantageous to have a ______ time horizon for investment.

longer

Given an investment amount and a set rate of interest, the ______ the time horizon the ______ the future value.

longer, greater

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

By definition, a bank that pays simple interest on a savings account will pay interest:

only on the principal amount originally invested.

With ___ interest, the interest is not reinvested.

simple

Which of the following is the multi-period formula for compounding a present value into a future value?

FV = PV × (1 + r)^t

True or false: Given the PV, FV, and payment amount, you can determine the number of periods.

false

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. True false question.

false

True or false: The present value is the sum of all expenses in a project.

false

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

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

future

The current value of a future cash flow discounted at the appropriate rate is called the ______ value.

present

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

true or false: Given the PV, FV, and life of the investment, you can determine the discount rate.

true

For a given time period (t) and interest rate (r), the present value factor is ______ the future value factor.

the reciprocal of 1 divided by

In a present value equation, the ____ rate (r) can be found using the PV, FV, and t.

discount

With discounting, the resulting value is called the ______ value, while with compounding the result is called the ______ value.

present, future

Which of the following are the primary as well as easy ways used to perform financial calculations today?

spreadsheet functions financial calculator

The present value is the current value of the ___ cash flows discounted at the appropriate discount rate.

future

Using the PV, discount rate, and ____, you can determine the number of periods.

fv

If FV = PV × (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)

The process of accumulating interest in an investment over time to earn more interest is called ______.

compounding