Week 2 4.1

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.

In a present value equation, the rate (r) can be found using the PV, FV, and t. (Enter one word per blank.)

Discount

True or false: When entering the interest rate in a financial calculator, you should key in the interest rate as a decimal.

FALSE

Using the PV, discount rate, ________and , you can determine the number of periods. (Enter abbreviation only.)

FV

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

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

Future

True or false: Future value refers to the amount of money an investment is worth today.

False

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.

False

Future value is the ________ value of an investment at some time in the future.

CASH

Future value is the cash _________ , Correct Unavailable value of an investment at some time in the future.

Cash

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

(1+r)

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

FV = PV×(1 + r)t

FV = ______ ×(1 + r)t

1

Which formula below represents a present value factor?

1/(1+r)t

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

compounding

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

present

Time value of money tables are not as common as they once were because:

they are available for only a relatively small number of interest rates. it is easier to use inexpensive financial calculators instead

The real world has moved away from using _____________________________ for calculating future and present values.

time value of money tables

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

2

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

An algebraic formula A financial calculator A time value of money table

The idea behind ______ is that interest is earned on interest.

Compounding

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

TRUE

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

TRUE

Calculating the present value of a future cash flow to determine its worth today is commonly called ___________ valuation.

discounted cash flow (DCF)

With _________ interest, the interest is not reinvested.

simple

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

PV = FV/(1+r)t

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