Module Two - 2
Example of a lower interest rate than expected.
Phillippe invested $1000 ten years ago and expected to have $1800 today. He has neither added nor withdrawn any money since his initial investment. All interest was reinvested and compounded annually. As it turns out, he only has $1680 in his account today.
Time and present value are inversely related, all else held constant.
Statement that correctly defines a time value money relationship
later; sooner; higher
Your goal is to have $1 million in your retirement savings on the day you retire. To fund this goal, you will make one lump sum deposit today. If you plan to retire ________ rather than _________ and earn a ___________ rate of interest, then you can deposit a smaller lump sum today.
increase
Your grandmother has promised to give you $10,000 when you graduate from college. If you speed up your graduation by one year and graduate two year from now rather than the expected three years, the present value of this gift will
Perpetuity
unending equal payments paid at equal time intervals
interest on interest
Art invested $100 two years ago at 8% interest. The first year, he earned $8 interest on his $100 investment. He reinvested the $8. The second year, he earned $8.64 interest on his $108 investment. The extra $.64 he earned in interest the second year is referred to as
In today's dollars, Chang Lee's money is worth more than Soo Lee's
Chang Lee is going to receive $20,000 six years from now. Soo Lee is going to receive $20,000 nine years from now. This statement is true if both individuals apply a discount rate of 7%
Compounding
Christina invested $3,000 fiver years ago and earns 2$ annual interest. By leaving her interest earnings in her account, she increases the amount of interest she earns each year. The way she is handling her interest income is referred to as
Ordinary annuity
Equal payments pads at the end of regular intervals over a stated time period
Decrease in the interest rate
Example of increasing the present value of a set amount to be received sometime in the future
8% interest for 10 years
Example of producing the lowest present value interest factor
Present value
Kurt won a lottery and will receive $1,000 a year for the next 50 years. The current value of these winnings is called the
Future Value
You are investing $100 today in a savings account. What term refers to the total value of this investment on year from now
Discount rate
Steve just computed the present value of a $10,000 bonus he will receive next year. the interest rate he used in his computation is referred to as the
Discounting
Terry is calculating the present value of a bonus he will receive next year. The process he is using is called
Compound interest
The interest earned on both the initial principal and the interest reinvested from prior period is called
discounted cash flow valuation
The process of determining the present value of future cash flows in order to know their value today is referred to as