Bus170 Ch 6

Katie is going to receive $1,000 three years from now. Wilt is going to receive $1,000 five years from now. Which one of the following statements is correct if both Katie and Wilt apply a 5% discount rate to these amounts?

Katie's money is worth more than Wilt's money today.

Kurt invests $1,000 at a 10% rate of return for twenty years. The return is based on simple interest that is paid at the end of each year. Which one of the following is correct?

Kurt will receive the same amount of interest each year.

Nadine invests $1,000 at 8% when she is 25 years old. Neal invests $1,000 at 8% when he is 40 years old. Both investments compound interest annually. Both Nadine and Neal retire at age 60. Which one of the following statements is correct?

Nadine will have more money when she retires than Neal.

Compound interest is best defined as the interest earned:

On prior year's interest which was reinvested.

The formula for a present value calculation using Excel is:

PV (rate, nper, pmt, fv).

The present value equation is:

PV = FVt/(1 + r)^t

The value today of future cash flows discounted at the appropriate discount rate is called the _____ value.

Present

You are choosing between investments offered by two different banks. One promises a return of 10% for three years using simple interest while the other offers a return of 10% for three years using compound interest. You should:

Choose the compound interest option because it provides a higher return.

Mary plans on saving $1,000 a year for ten years. She would like to know the value of these savings today. Mary should solve for the:

Present value.

The current value of future cash flows discounted at the appropriate discount rate is called the:

Present value.

The discounted value of money is called the:

Present value.

The value computed using the factor 1/(1 + r)^t is called the:

Present value.

The current value of future cash flows discounted at the appropriate discount rate to current time is called the _____ value.

Present.

Interest earned only on the original principal amount invested is called _____________

Simple interest.

Interest earned only on the original principal amount invested is called _____ interest.

Simple.

Fresh out of college, you are negotiating with your prospective new employer. They offer you a signing bonus of $2,000,000 today or a lump sum payment of $2,500,000 three years from now. If you can earn 7% on your invested funds, which of the following is true?

Take the lump sum because it has the higher present value.

Which one of the following statements is correct if you invest $100 in an account at a simple interest rate of 4% for five years?

The amount of interest you earn in year five will equal the interest you earn in year one, whether or not you reinvest your earnings.

Suppose you are trying to find the present value of two different cash flows using the same interest rate for each. One cash flow is $1,000 ten years from now, the other $800 seven years from now. Which of the following is true about the discount factors used in these valuations?

The discount factor for the cash flow ten years away is always less than or equal to the discount factor for the cash flow that is received seven years from now.

Which one of the following statements is correct?

The future value of $100 invested at 6%, compounded annually, increases over time in an exponential manner.

The term interest-on-interest refers to:

The interest earned on previous interest earnings which were reinvested.

The present value factor will decrease:

The longer the period of time.

The future value factor will decrease

The lower the interest rate.

The future value interest factor is calculated as:

(1 + r)^t

The present value interest factor is calculated as:

1/(1 + r)^t

At a 6% rate of interest you will double your money in approximately ___ years.

12

At a 3% rate of interest, you will quadruple your money in approximately ____ years.

48

The process of finding the present value of some future amount is often called _____________.

Discounting.

The process of finding the present value of some future amount is often called:

Discounting.

When using a financial calculator, you should: I. Check the mode for beginning or ending. II. Clear the calculator before starting a problem. III. Use a sufficient number of decimal places. IV. Check the number of payments per year.

Do I, II, III, and IV

Many financial calculators require that:

Either the present value or the future value be input as a negative number when solving for the number of periods.

The future value of C invested at r% for t periods is:

FV = c(1 + r)^t.

The factor (1 + r)t is called the:

Future value interest factor.

The amount an investment is worth after one or more periods of time is the ___________.

Future value.

The amount an investment will worth after one or more periods of time is the _____ value.

Future.

The greater the number of years, the:

Greater the compounding effect.

The future value of a single sum will increase more rapidly when: I. The interest rate increases. II. The interest rate decreases. III. The frequency of compounding increases. IV. The frequency of compounding decreases.

I and III only

The future value will increase: I. The longer the period of time. II. The shorter the period of time. III. The higher the rate of interest. IV The lower the rate of interest.

I and III only

Given r and t greater than zero: I. Present value interest factors are less than one. II. Future value interest factors are less than one. III. Present value interest factors are greater than future value interest factors. IV. Present value interest factors grow as t grows, provided r is held constant.

I only

Jamie deposits $1,000 into an account that pays 4% interest compounded annually. Chris deposits $1,000 into an account that pays 4% simple interest. Both deposits were made today. Which of the following statements are true concerning these two accounts? I. At the end of one year, both Jamie and Chris will have the same amount in their accounts. II. At the end of five years, Chris will have more money in his account than Jamie has in hers. III. Chris will never earn any interest on interest. IV. All else equal, Jamie made the better investment.

I, III, and IV only

Which of the following statements are correct given a constant interest rate and constant five year period of time? I. An increase in the future value causes the present value to decline. II. An increase in the future value causes the present value to increase. III. There is an inverse relationship between the present value and the future value. IV. There is a direct relationship between the present value and the future value.

II and IV only

Which of the following statements is (are) true concerning the present value of a single sum? I. The higher the discount rate, the higher the present value. II. The longer the time period, the higher the present value. III. The larger the future value, the larger the present value. IV. The larger the present value factor, the larger the present value.

III and IV only

Tom and Antonio both want to open savings accounts today. Tom wants to have $1,000 in his savings account six years from now. Antonio wants to have $1,000 in his savings account three years from now. Which of the following statements is(are) correct assuming that both Antonio and Tom earn the same rate of interest? I. Tom needs to deposit more money into his account today than does Antonio. II. Tom will need to deposit twice the amount of money today as Antonio. III. Antonio needs to deposit more money into his account today than does Tom. IV. Antonio needs to deposit twice the amount of money today as Tom.

III only

Which of the following statements is/are accurate? All else the same, ______________. I. present values increase as the discount rate increases II. present values increase the further away in time the future value III. present values are always smaller than future values when both r and t are positive

III only

You invest $1,000 in an account paying 5% simple interest. You do not add nor withdraw any funds from this account. Every year, your account balance will:

Increase by a constant amount.

To create the same future value given a stated discount rate, you can:

Increase the present value and decrease the time period.

To decrease the amount required today to fund a $10,000 debt due two years from now, you could _____ on your savings.

Increase the rate of interest earned

Compound interest means that you earn:

Interest on both the principal and prior reinvested interest.

Interest earned on the reinvestment of previous interest payments is called _____________.

Interest on interest.

Interest earned on the reinvestment of previous interest payments is called _____ interest.

Interest on.

Future value is best defined as:

The amount an investment is worth at the end of some stated period of time.

Sun Lee has $500 today. Which one of the following statements is correct if she invests this money at a positive rate of interest for five years?

At the end of the five years Sun Lee will have less money if she invests at 5% rather than at 7%.

Neal wants to borrow $2,500 and has received the following offers from his local banks. Which offer should Neal accept if he wants to repay the loan in one single payment two years from now?

Bank A, which offers a simple rate of 4%.

Isabelle wants to invest $1,000. She wants to withdraw her money three years from now. Which bank should she use if she wishes to maximize her investment?

Bank D, which offers a rate of 5% compounded monthly

As long as the interest rate is greater than zero, the present value of a single sum will always:

Be less than the future value.

Fred and Max each want to have $10,000 saved five years from now. Fred can earn 4.35%, compounded annually, on his savings and Max can earn 4.50%, compounded annually, on his savings. Both Fred and Max are going to deposit one lump sum today and will not add any additional funds to their accounts. Given this, Max _____ deposit _____ Fred to achieve the goal.

Can; less than

Monika has $6,000 in her investment account. She wants to withdraw her funds when her account reaches $10,000. A decrease in the rate of return she earns will:

Cause her to wait longer before withdrawing her money.

Interest earned on both the initial principal and the interest reinvested from prior periods is called ____________.

Compound interest.

Interest earned on both the initial principal and the interest reinvested from prior periods is called _____ interest.

Compound.

The process of accumulating interest on an investment over time to earn more interest is called:

Compounding.

Given a constant future value and discount rate, an increase in the number of time periods will _____ the present value

Decrease

As the discount rate increases, the present value of $500 to be received six years from now:

Decreases.

Grandma Jenkins knows that she has between six and nine months left to live. She wants to leave each of her grandchildren $1,000 when she dies. For this purpose, she has established a trust fund and has deposited sufficient monies to provide for her twelve grandchildren. Today, she just discovered that her daughter is going to have twins, increasing the number of her grandchildren to thirteen. To ensure her final wish is fully funded, Grandma Jenkins needs to:

Deposit a little less than $1,000 into her trust account

The rate used to find the present value of a future payment is called the:

Discount rate.

The interest rate used to calculate the present value of future cash flows is called the _____ rate

Discount.

The interest rate used to calculate the present value of future cash flows is called the ____________ rate.

Discount.

The rate of return used when computing a present value is referred to as the ______ rate while the rate used when computing a future value is referred to as the _____ rate.

Discount; compound.

Calculating the present value of a future cash flow to determine its value today is called:

Discounted cash flow valuation.

On a financial calculator, the symbol "N" represents the:

Time periods.

The concept that a dollar received today is worth more than a dollar received tomorrow is referred to as the:

Time value of money.

Present value is defined as the

Value of future cash flows in today's dollars given a specific discount rate.